Answer :
Given an expected inflation premium of 1.45%
A real rate of interest of 4.34%,
Nominal interest rate stands 5.8529%
What stands the nominal interest rate?
The calculation of the nominal interest rate is shown
Nominal interest rate = (1 + Inflation premium) × (1 + Real rate of interest) - 1
= (1 + 1.45%) × (1 + 4.34%)- 1
= (1 + 0.0145) × (1 + 0.0434) - 1
= 1.0145 × 1.0434 - 1
= 1.058529 - 1
= 0.058529
or
= 5.8529%
What is the distinction between real interest rate and nominal interest rate?
Interest rates can be represented in nominal or real terms. A nominal interest rate equals the real interest rate plus a projected rate of inflation. A real interest rate mirrors the true worth of funds to the borrower and the actual yield to the lender or to an investor.
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