The two-year interest rate is 11.6% and the expected annual inflation rate is 5.8%. a. What is the...

Question

The two-year interest rate is 11.6% and the expected annual inflation rate is 5.8%. a. What is the expected real interest rate?b. What about the nominal rate

Robert · Accepted Answer

Part A: 
Real rate = 1.116/1.058 – 1 = 1.054820 - 1 
Real Rate = .054820, or 5.48%. 
Real Rate = 5.48%
Part B: 
Inflation Rate = 5.8% 
The nominal rate = (1 + Real Interest rate) * (1 + Inflation Rate) - 1 
The nominal rate = (1 + 0.0548) * (1 + 0.058) - 1 
The nominal rate = 1.

The two-year interest rate is 11.6% and the expected annual inflation rate is 5.8%. a. What is the expected real interest rate?b. What about the nominal rate

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