Re: (VU-Study-Corner) FIN622 GDB Idea Solution......

Thanks yaar... it worked.....

On 28 April 2010 03:54, Hafiz Salman Majeed <hafiz.salman.majeed@gmail.com> wrote:

Dear Students....

FIN622 GDB Idea Solution......Provided by Faisal Bukhari.....

 

Why inflation premium and risk premium is added to real interest rate in order to arrive at value of nominal interest rate?

Note: Your answer should be concise and must not exceed 50 words

Solution:

Nominal interest rates refer to referes to the rate of interest prior to taking inflation into account. Depending on its application, an inflation and risk premium must be added to the real interest rate in order to obtain the nominal rate.

Nominal Interest Rate = Real Interest Rate + Inflation Premium + Risk Premium

In practice, the inflation premium is often assumed to be the expected inflation rate and the risk premium is ignored. Unless the economy is experiencing a deflationary period, the nominal rate will be higher than the real rate.

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Regards...
Do Remember Me In Your Prays...
Hafiz Salman Majeed....
MBA 2nd Semester......
http://www.vuaskari.com
Hafiz.Salman.Majeed@gmail.com

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