Asked by megha ramani on May 02, 2024
Verified
Identify and discuss the various components of a nominal interest rate.
Nominal Interest Rate
The stated interest rate of a financial product, not adjusting for inflation, representing the actual rate charged by lenders to borrowers.
- Clearly describe the different elements that make up a nominal interest rate.
Verified Answer
OM
Olivia mualimMay 09, 2024
Final Answer :
At a minimum, students should identify the real rate, the inflation premium, and the interest rate risk premium. The real rate tends to remain relatively constant. The inflation premium varies over time based on inflation expectations. The interest rate risk premium varies over time based on expected changes in the interest rates. Students might also mention a liquidity premium, a taxability premium, and a default risk premium.
Learning Objectives
- Clearly describe the different elements that make up a nominal interest rate.