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Inflation is expected to be 3 percent over the next year. You desire
an annual real rate of return of 2.5 percent on your investments.
a. What nominal rate of interest would have to be offered on a
one-year Treasury security for you to consider making an
investment?
b. A one-year corporate debt security is being offered at 2
percentage points over the one-year Treasury security rate
that meets your requirement in (a). What would be the nominal
interest rate on the corporate security?
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