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ProduceCom and MakeItCom are two companies of identical size in two different countries, one with a...

ProduceCom and MakeItCom are two companies of identical size in two different countries, one with a high inflation rate and one with a low inflation rate. ProduceCom is in a country where the inflation rate is 12% and it needs to pay an interest rate of 17% when it borrows. MakeItCom is in a country where the inflation rate is 3%, but it needs to pay a rate of 9% when it borrows. If the time value of money is the same in both economies, which company is being charged a higher risk premium?
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Answer #1

A risk premium can be defined as the rate of return that is provided in excess to that of a risk-free rate
of return which is provided by an investment. Here lenders are providing funds to ProduceCom at a
rate of 17 percent while the risk free interest rate is 17 - 12 = 5%. Lenders allow MakeItCom to borrow
at 9 percent when the risk free interest rate is 9 - 3 = 6%. Since MakeItCom is paying a higher real
interest rate, it is being charged a higher risk premium.

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