LOS b: Explain an interest rate as the sum of a real risk-free rate, expected inflation, and premiums that compensate investors for distinct types of risk.

1、The real risk-free rate can be thought of as:

A)   approximately the nominal risk-free rate plus the expected inflation rate.

B)   approximately the nominal risk-free rate reduced by the expected inflation rate.

C)   exactly the nominal risk-free rate reduced by the expected inflation rate.

D)   exactly the nominal risk-free rate plus the expected inflation rate.

A)   real risk-free rates because they contain an inflation premium.

B)   real rates because they contain an inflation premium.

C)   nominal risk-free rates because they contain an inflation premium.

D)   nominal risk-free rates because they do not contain an inflation premium.

A)   The real risk-free rate, the expected inflation rate, the default risk premium, a liquidity premium and a premium to reflect the risk associated with the maturity of the security.

B)   The real risk-free rate, the default risk premium, a liquidity premium and a premium to reflect the risk associated with the maturity of the security.

C)   The real risk-free rate, the expected inflation rate and a liquidity premium.

D)   The nominal risk-free rate, the expected inflation rate, the default risk premium, a liquidity premium and a premium to reflect the risk associated with the maturity of the security.

答案和详解如下：

LOS b: Explain an interest rate as the sum of a real risk-free rate, expected inflation, and premiums that compensate investors for distinct types of risk.

1、The real risk-free rate can be thought of as:

A)   approximately the nominal risk-free rate plus the expected inflation rate.

B)   approximately the nominal risk-free rate reduced by the expected inflation rate.

C)   exactly the nominal risk-free rate reduced by the expected inflation rate.

D)   exactly the nominal risk-free rate plus the expected inflation rate.

The correct answer was B)

The approximate relationship between nominal rates, real rates and expected inflation rates can be written as: 

Nominal risk-free rate = real risk-free rate + expected inflation rate.

Therefore we can rewrite this equation in terms of the real risk-free rate as: 

Real risk-free rate = Nominal risk-free rate – expected inflation rate

The exact relation is: (1 + real)(1 + expected inflation) = (1 + nominal)

2、T-bill yields can be thought of as:

A)   real risk-free rates because they contain an inflation premium.

B)   real rates because they contain an inflation premium.

C)   nominal risk-free rates because they contain an inflation premium.

D)   nominal risk-free rates because they do not contain an inflation premium.

The correct answer was C)

T-bills are government issued securities and are therefore considered to be default risk free. More precisely, they are nominal risk-free rates rather than real risk-free rates since they contain a premium for expected inflation.

3、Which one of the following statements best describes the components of the required interest rate on a security?

A)   The real risk-free rate, the expected inflation rate, the default risk premium, a liquidity premium and a premium to reflect the risk associated with the maturity of the security.

B)   The real risk-free rate, the default risk premium, a liquidity premium and a premium to reflect the risk associated with the maturity of the security.

C)   The real risk-free rate, the expected inflation rate and a liquidity premium.

D)   The nominal risk-free rate, the expected inflation rate, the default risk premium, a liquidity premium and a premium to reflect the risk associated with the maturity of the security.

The correct answer was A)

The required interest rate on a security is made up of the nominal rate which is in turn made up of the real risk-free rate plus the expected inflation rate. It should also contain a liquidity premium as well as a premium related to the maturity of the security.