What is the risk-free rate in an environment where the real rate is 3% and inflation is running at 3%? Use either method found in chapter one.
A)14.5% or just 14%
B)10.21% or just 10%
C)6.09% or just 6%
D)9.09% or just 9%
E)0%

Question

Quizplus · Accepted Answer

The risk-free rate can be calculated using the Fisher equation, which is (1 + nominal rate) = (1 + real rate) * (1 + inflation rate). Using the given real rate of 3% (or 0.03) and inflation rate of 3% (or 0.03), we get (1 + nominal rate) = (1 + 0.03) * (1 + 0.03) = 1.0609, which implies a nominal (or risk-free) rate of approximately 6.09%.

What Is the Risk-Free Rate in an Environment Where the Real