The Current One-Year Nominal Interest in Canada Is 7

question 11

Multiple Choice

The current one-year nominal interest in Canada is 7%.If the anticipated inflation for the coming year in Canada is 2.5%, what is the real interest rate?

• A)4.21%
• B)4.39%
• C)4.50%
• D)7.18%

---

Definitions:

Risk Premiums

The additional return demanded by investors for taking on higher risk, over and above the risk-free rate of return.

Real Risk-Free Rate

The interest rate on a risk-free asset, after adjusting for inflation, indicating the true return on a risk-free investment.

Inflationary Expectations

Anticipations of future inflation that can influence economic behaviors in the present.

Default Risk Premium

The additional amount a borrower must pay to compensate the lender for assuming the risk that the borrower may default on the loan.