Discuss the two major factors that determine the market nominal risk-free rate.
Nominal Risk-Free Rate:
The nominal risk-free rate is the rate on government securities. Although the rate on short term sovereign securities is not truly risk-free, it may be considered as risk-free for practical purposes.
Answer and Explanation:
The two major factors that determine the nominal risk-free rate are:
- Real risk-free rate - is the risk-free rate that should be equal across the economies and which does not consider the effect of inflation. Theoretically, it should be the same for all countries.
- Inflation Rate - is the general increase in prices for a given economy. The risk-free rate compensates for inflation because nobody would want to see a depreciation in the value of their investment.
Become a member and unlock all Study Answers
Try it risk-free for 30 daysTry it risk-free
Ask a question
Our experts can answer your tough homework and study questions.Ask a question Ask a question
Learn more about this topic:
from Financial Accounting: Help and ReviewChapter 5 / Lesson 26