Question

The risk-free interest rate can be expressed as a function of which of the following? Real...

The risk-free interest rate can be expressed as a function of which of the following?

Real rate of interest and the inflation premium

Real rate of interest, inflation premium, and the default risk premium

Deflation premium, real rate of interest, and the default risk premium

Default risk premium, market risk premium, and the liquidity premium
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Answer #1

The risk-free interest rate can be expressed as a function of Real rate of interest and the inflation premium.

Explanation-The risk-free interest rate consists of a real risk-free rate of interest and an inflation premium

The risk-free interest rate=real risk-free interest rate + inflation premium

The inflation premium is a part of the investment return that compensates investor for the loss of purchasing power over time.

The risk-free rate is used in the calculation of the cost of equity. It is the minimum return that an investor expects from an investment.

Cost of Equity= Risk free rate+ Beta(Market Risk Premium- Risk free rate)

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