The risk-free rate is 3.4 %,and expected inflation is 1 %. If inflation expectations change such...
Question:
The risk-free rate is 3.4 %,and expected inflation is 1 %. If inflation expectations change such that future expected inflation rises to 4.8 %, what will the new risk-free rate be?
The Risk-free Rate:
The risk-free rate of return is an interest rate on security or a debt instrument that has no risk. Generally, all investments carry some risk and therefore, the risk-free rate is just a hypothetical or a theoretical rate.
Answer and Explanation: 1
Become a Study.com member to unlock this answer! Create your account
View this answer
The real risk-free rate is calculated as:
- {eq}\text{Real risk free rate} = [ \dfrac{\text{Nominal risk rate + 1}}{\text{Inflation rate + 1}} ] -...
See full answer below.
Ask a question
Our experts can answer your tough homework and study questions.
Ask a question Ask a questionSearch Answers
Learn more about this topic:
Get access to this video and our entire Q&A library
Capital Asset Pricing Model | Definition, Formula & Examples
from
Chapter 15 / Lesson 6
7K
What is the Capital Asset Pricing Model? Learn the definition and formula of CAPM, the assumptions that CAPM uses, and its importance in finance. Also, study examples and uses of CAPM.
Related to this Question
- Due to a recession, expected inflation this year is only 2.75%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above 2.75%. Assume that the expectations theory holds and the real risk-free rate (r*) is 2.5%.
- Due to a recession, expected inflation this year is only 3.75%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above 3.75%. Assume that the expectations theory holds and the real risk-free rate (r*) is 2.5%.
- Due to a recession, expected inflation this year is only 2%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above 2%. Assume that expectations theory holds and the real risk-free rate is r* = 3.25%. If the y
- Default Risk Premium The real risk-free rate, r*, is 2.25%. Inflation is expected to average 2.5% a year for the next 4 years, after which time inflation is expected to average 3.4% a year. Assume tha
- The rate of inflation for the coming year is expected to be 3 percent, and the rate of inflation in Year 2 and thereafter is expected to remain constant at some level above 3 percent. Assume that the real risk-free rate, r*, is 2 percent for all maturitie
- The real risk-free rate, r*, is 2.8%. Inflation is expected to average 2.05% a year for the next 4 years, after which time inflation is expected to average 3.6% a year. Assume that there is no maturit
- The real risk-free rate, r*, is 2.95%. Inflation is expected to average 2.45% a year for the next 4 years, after which time inflation is expected to average 3.25% a year. Assume that there is no matur
- The real risk-free rate, r*, is 3.15%. Inflation is expected to average 1.65% a year for the next 4 years, after which time inflation is expected to average 4.8% a year. Assume that there is no maturi
- The real risk-free rate, r*, is 2.3%. Inflation is expected to average 2.9% a year for the next 4 years, after which time inflation is expected to average 3.85% a year. Assume that there is no maturit
- The real risk-free rate, r*, is 1.8%. Inflation is expected to average 2.8% a year for the next 4 years, after which time inflation is expected to average 4.5% a year. Assume that there is no maturity
- Suppose the real risk-free rate is 2.50% and the future rate of inflation is expected to be constant at 4.10%. What rate of return would you expect on a 5-year Treasury security, assuming the pure expectations theory is valid?
- Due to a recession, expected inflation this year is only 3.25%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above 3.5%. Assume that the expectations t
- Due to a recession, expected inflation this year is only 2.5%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above 2.5%. Assume that the expectations th
- The real risk free rate of interest is 2%. Inflation is expected to be 2% this coming year, jump to 3% next year and increase to 4% the year after (year 3). According to the expectations theory, what should be the interest rate on 3-year, risk free securi
- The real risk free rate is 1.7%. Inflation is expected to average 1.5% a year for the next 4 years after which time inflation is expected to average 4.8% a year. Assume that there is no maturity risk
- The real risk-free rate of interest is expected to remain constant at 3% for the foreseeable future. However, inflation is expected to steadily increase over the next 20 years. So, the Treasury yield
- The real risk-free rate is 3.25%. Inflation is expected to be 2.5% this year, 3.85% next year, and then 2.45% thereafter. The maturity risk premium is estimated to be 0.05(t - 1)%, where t = number of
- The real risk-free rate is 2.1%. Inflation is expected to be 3.15% this year, 3.95% next year, and then 3.2% thereafter. The maturity risk premium is estimated to be 0.05(t - 1)%, where t = number of
- The real risk-free rate is 2.65%. Inflation is expected to be 3.2% this year, 4.1% next year, and then 2.5% thereafter. The maturity risk premium is estimated to be 0.05(t - 1)%, where t = number of y
- The real risk-free rate is 3.4%. Inflation is expected to be 3.2% this year, 3.75% next year, and then 3% thereafter. The maturity risk premium is estimated to be 0.05(t - 1)%, where t = number of yea
- The real risk-free rate is 2.9%. Inflation is expected to be 2.15% this year, 3.75% next year, and then 3.1% thereafter. The maturity risk premium is estimated to be 0.05(t - 1)%, where t = number of
- The real risk-free rate is 2.7%. Inflation is expected to be 2.15% this year, 3.65% next year, and then 2.1% thereafter. The maturity risk premium is estimated to be 0.05(t - 1)%, where t = number of
- The real risk-free rate is 2.75%. Inflation is expected to be 2.9% this year, 4.9% next year, and then 2.35% thereafter. The maturity risk premium is estimated to be 0.05(t - 1)%, where t = number of
- The real risk-free rate is 2.9%. Inflation is expected to be 2.25% this year, 3.7% next year, and then 2.75% thereafter. The maturity risk premium is estimated to be 0.05(t - 1)%, where t = number of
- Due to a recession, expected inflation this year is only 2.5%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above 2.5%. Assume that expectations theory
- The real risk free rate, r*, is 1.65%. Inflation is expected to average 2.3% a year for the next 4 years, after which time inflation is expected to average 5.4% a year. Assume that there is no maturit
- Suppose that real risk free rate is 2.50% and the future rate of inflation is expected to be constant at 2.20%. What rate of return would you expect on a Treasury Bill, assuming the pure expectations
- The real risk-free rate is 2.05%. Inflation is expected to be 3.15% this year, 4.7% next year, and 2.75% thereafter. The maturity risk premium is estimated to be 0.05(t - 1)%, where t = number of year
- The real risk-free rate is 2.3%. Inflation is expected to be 2.45% this year, 3.65% next year, and 3.35% thereafter. The maturity risk premium is estimated to be 0.05(t - 1)%, where t = number of year
- According to rational expectations: A) Expectations of inflation are viewed as being an average of past inflation rates. B) Expectations of inflation are viewed as being an average of expected future inflation rates. C) Expectations formation indicates th
- The real risk-free rate is 1.5 percent. Inflation is expected to be 3.5 percent this year, 4 percent next year, and 5 percent thereafter. The maturity risk premium is estimated to be 0.08 � (t - 1)%,
- The real risk-free rate of interest (r*) is 3 percent. Inflation is expected to be 4 percent this coming year, jump to 5 percent next year, and increase to 6 percent the year after. According to the e
- The real risk-free rate, r*, is expected to remain constant at 3%. Inflation is expected to be 2% a year for the next 3 years, and then 4% a year thereafter. The maturity risk premium 0.1% times (t mi
- The real risk-free rate is 2 percent. Inflation is expected to be 3 percent this year, 4 percent next year, and then 3.5 percent thereafter. The maturity risk premium is estimated to be 0.0005 X (t-1)
- The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be 3% per year for each of the next five years and 2% thereafter. The maturity risk premium (MRP) is d
- The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be 7% per year for each of the next five years and 6% thereafter. The maturity risk premium (MRP) is
- The real risk-free rate, r*, is 2.5 percent. Inflation is expected to average 2.8 percent a year for the next 4 years, after which time inflation is expected to average 3.75 percent a year. Assume that there is no maturity risk premium. An 8-year corpora
- The risk-free rate is equal to the real rate of return plus: A) an expected inflation premium. B) a risk premium. C) both an inflation and a risk premium. D) the prevailing prime rate.
- Due to a recession, expected inflation this year is only 3.25%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above 3.25%. Assume that the expectations
- Due to a recession, expected inflation this year is only 2.75%. However, the inflation rate in year 2 and thereafter is expected to be constant at some level above 2.75%. Assume that the expectations
- Due to a recession, expected inflation this year is only 3.5%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above 3.5%. Assume that the expectations th
- Due to a recession, expected inflation this year is only 1.0%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above 1.0%. Assume that the expectations th
- The risk-free rate on T-bills recently was 1.23%. If the real rate of interest is estimated to be 0.80%, what was the expected level of inflation?
- The required rate of return on any security consists of a a. risk premium plus an expected inflation rate b. risk free rate plus a risk premium c. inflation rate plus a marketability premium d. risk free rate plus an inflation premium
- The real risk-free rate,r*, is expected to remain constant at 3% per year. Inflation is expected to be 2% per year forever. Assume that the expectations theory holds; that is no maturity risk premium.
- The real risk free rate r us 2.8% and is expected to remain constant. Inflation is expected to be 7% per year each of the next two years and 6% thereafter. The maturity risk premium MRP is determined
- Inflation Due to a recession expected inflation this year is only 3.25%. However, the inflation rate in year 2 and thereafter is expected to be constant at some level above 3.25%. Assume that expectat
- Due to a recession, expected inflation this year is only 3%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above 3%. Assume that the expectations theory
- Due to a recession, expected inflation this year is only 2%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above 2%. Assume that the expectations theory
- The real-risk free rate (r ^*) is 2.8% and is expected to remain constant. Inflation is expected to be 4% per year for each of the next five years and 3% thereafter. The maturity risk premium (MRP) is determined from the formula: 0.1(1-t)%, where t is the
- Suppose the real risk-free rate is 3.50% and the future rate of inflation is expected to be constant at 2.20%. What rate of return would you expect on a 1-year Treasury security?
- Suppose the real risk free rate is 3.50, inflation next year is expected to be 1.5, 2.5 two years from now and 3 thereafter. There is a maturity premium of 0.2 per year to maturity i.e. MRP 0.20 t, wh
- The real risk -free rate, r*, is expected to remain constant at 3%. Inflation is expected to be 2% a year for the next 3 years, and then 4% a year thereafter. The maturity risk premium 0.1% times (t m
- The real rate of interest is currently 2%; the inflation expectation and risk premiums for a security are shown below. Inflation expectation premium Risk premium 10% 2% a. Find the risk-free rate of
- Suppose the real risk-free rate is 4.20%, the average expected future inflation rate is 2.50%, and a maturity risk premium of 0.10% per year to maturity applies, i.e., MRP = 0.10%(t), where t is the n
- Suppose the real risk-free rate is 3.00%, the average expected future inflation rate is 2.25%, and a maturity risk premium of 0.10% per year to maturity applies, i.e., MRP = 0.10%(t), where t is the n
- If the nominal rate of interest 13.51% and the real rate of interest is 8.19%, what is the expected rate of inflation? The expected rate of inflation is %
- Suppose the real risk-free rate is 3.50% and the future rate of inflation is expected to be constant at 2.20%. What rate of return would you expect on a 1-year Treasury security, assuming the pure ex
- The real risk-free rate is 3%. Inflation is expected to be 3% this year, 4% next year, and 3.5% thereafter. The maturity risk premium is estimated to be 0.05 x (t-1), where t=number of years to maturi
- The excess return is computed as the a) Risk-free rate plus the inflation rate. b) Risk-free rate minus the inflation rate. c) Return on a risky security minus the risk-free rate. d) Risk premium
- Assume that expected rates of inflation over the next 5 years are 4%, 7%, 10%, 10%, and 9%, respectively. What is the inflation premium on a three-year bond (i.e., IP3), and what is the inflation pre
- Suppose 1-year T-bills currently yield 5.00% and the future inflation rate is expected to be constant at 2.90% per year. What is the real risk-free rate of return, r*
- Suppose 1-year T-bills currently yield 5.40% and the future inflation rate is expected to be constant at 2.90% per year. What is the real risk-free rate of return?
- Because of a recession, the inflation rate expected for the coming year is only 4%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above 4%. Assume that
- Because of a recession, the inflation rate expected for the coming year is only 3%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above 3%. Assume that
- Because of a recession, the inflation rate expected for the coming year is only 4%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above 3%. Assume that
- Assume that the risk free rate is 1.0%. Inflation is expected to be 4% in year one; 3.5% in year two; 3% in year three; 2.5% in year four and then 2% thereafter; the liquidity premium is 0.80%; the maturity risk premium is calculated as MRP = 0.05% (t - 1
- Due to a recession, expected inflation this year is only 2.25%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above 2.25%. Assume that expectations theo
- Suppose 1-year T-bills currently yield 7.00% and the future inflation rate is expected to be constant at 2.00% per year. What is the real risk-free rate of return, r*? The cross-product term should be
- Suppose the real risk-free rate is 2.50% and the future rate of inflation is expected to be constant at 4.10%. What rate of return would you expect on a 5-year Treasury security, assuming the pure exp
- Suppose the real risk-free rate is 2.50% and the future rate of inflation is expected to be constant at 3.05%. What rate of return would you expect on a 5-year Treasury security, assuming the pure exp
- Suppose the real risk-free rate is 3.50% and the future rate of inflation is expected to be constant at 5.30%. What rate of return would you expect on a 1-year Treasury security, assuming the pure exp
- Suppose the real risk-free rate is 3.50% and the future rate of inflation is expected to be constant at 4.80%. What rate of return would you expect on a 1-year Treasury security, assuming the pure exp
- Suppose 1-year T-bills currently yield 7.00% and the future inflation rate is expected to be constant at 3.20% per year. What is the real risk-free rate of return, r*? Disregard any cross-product term
- The real risk-free rate is 3 %. Inflation is expected to be 3% this year, 4% next year and 3.5 % thereafter. The MRP is estimated to be 0.05% (t - 1) where t is the number of years to maturity. What i
- Assume that a 3-year treasury security yields 3.70%. Also, assume that the real risk-free rate is 0.75%, and inflation is expected to be 2.25% annually for the next 3 years. In addition to inflation,
- Assume that inflation is expected to steadily decline in the years ahead, but the real risk-free rate, r*, is expected to remain constant. Which of the following statements is most correct? A. If the
- A _____ yield curve predicts a future increase in inflation. A) steeply upward sloping B) slight upward sloping C) flat D) downward sloping If a higher inflation is expected, what would you expect to
- 1. Due to a recession, expected inflation this year is only 3.25%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above 3.25%. Assume that the expectatio
- The two-year interest rate is 11.4% and the expected annual inflation rate is 5.7%. a) What is the expected real interest rate? b) If the expected rate of inflation suddenly rises to 7.7%, what will
- A) The current rate of inflation is 3 percent, and long-term Treasury bonds are yielding 7 percent. You estimate that the rate of inflation will increase to 6 percent. What do you expect to happen to
- Suppose the inflation rate is expected to be 7.05% next year, 4.6% the following year, and 3.95% thereafter. Assume that the real risk-free rate, r*, will remain at 2% and that maturity risk premiums
- Suppose expectations are such that the rate of inflation for the foreseeable future is pegged at 5%. Further suppose that lenders and investors are seeking a 4% real return and the risk premium is zer
- The current rate of inflation is 3%, and long-term Treasury bonds are yielding 7%. You estimate that the rate of inflation will increase to 6%. What do you expect to happen to long term bond yields? Compute the effect of this change in inflation on the pr
- An increase in either risk or inflation would likely lead to which of the following results? a. Higher interest rates. b. Lower interest rates. c. Unlikely to affect the level of interest rates.
- If inflation is expected to decrease in the future and the real rate is expected to remain steady, then the Treasury yield curve is downward sloping. (Assume MRP = 0.) True False The default risk on W
- Assume that inflation is expected to decline steadily in the future, but that the real risk-free rate, r*, will remain constant. Which of the following statements is correct, other things held constan
- An investor in Treasury securities expects inflation to be 2.5% in Year1, 3.2% in Year2, and 3,6% each year thereafter. Assume that the real risk-free rate is 2.75% and that this rate will remain cons
- Suppose 1-year Treasury bills currently yield 7.00% and the future inflation rate is expected to be constant at 3.20% per year. What is the real risk-free rate of return, r*? Disregard any cross-produ
- If inflation expectations increase, what would you expect to happen to the bond prices?
- Nominal rate of interest is equal to: A. the real rate plus a risk premium B. the real rate plus an inflationary expectation C. the risk-free rate plus an inflationary expectation D. the risk-free rat
- If inflation expectations increase, what would you expect to happen to the returns required by investors in bonds?
- Suppose the real risk free rate and inflation rate are expected to remain at their current levels throughout the foreseeable future. Consider all factors that affect the yield curve. then identify whi
- 1. Suppose the real risk-free rate and inflation rate are expected to remain at their current levels throughout the foreseeable future. Consider all factors that affect the yield curve. Then identify
- Economists forecast the following inflation rates for the next four years Year Inflation Rate 1 - 3% 2 - 4% 3 - 5% 4 - 6% Under these conditions the ____ theory says the yield curve should slope ____
- A three-year treasury security currently earns 2.11 percent. Over the next three years, the real risk-free rate is expected to be 1.2 percent, and the inflation premium is expected to be 0.60 percent
- Suppose the inflation rate is expected to be 7% next year, 5%. the following year, and 3% thereafter. Assume that the real risk-free rate, r*, will remain at 2% and that maturity risk premiums on Trea
- Assume that the real risk-free rate, r*, is 3% and that inflation is expected to be 8% in Year 1, 5% in Year 2, and 4% thereafter. Assume also that all Treasury securities are highly liquid and free o
- Assume that the real risk-free rate, r*, is at 3% and that inflation is expected to be at 8% in Year 1, 5% in Year 2, and 4% thereafter. Assume also that all Treasury securities are highly liquid and
- Assume the real risk-free rate is 1%. Assume also that inflation is expected to be 1% in the coming year (year 1), 2% in the next year after that (year 2), and 3% in the year after that (year 3). Assu
Explore our homework questions and answers library
Browse
by subject