(a) Can the nominal interest rate increase while the real interest rate decreases? Briefly explain.

(b) If the real interest rate is 3 percent and the expected inflation premium is 8 percent, what should be the annual approximate nominal interest rate on UK Treasury securities?

(c) If the nominal interest rate on corporate bonds is 11 percent, the expected inflation premium is 3 percent, and the corporate bond risk premium is 4 percent, what is the approximate real interest rate on these bonds?

Answer rating: 100% (QA)

a Yes the nominal interest rate can increase while the real interest rate decreases The nominal inte... View the full answer