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Verizon [17]
2 years ago
11

Lola wants to make an 6% real return on a loan that she is planning to make, and the expected inflation rate during the period o

f the loan is 5%. She should charge an interest rate of
Business
1 answer:
tatuchka [14]2 years ago
5 0

Answer:

11%

Explanation:

Interest rate is considered to be composed of following components:

- Real risk free interest rate

- Inflation premium*

- Default risk premium

- Liquidity premium

- Maturity premium

Based on above, interest rate (r) is equal to:

r = real risk free interest rate + Inflation premium + Default risk premium + liquidity premium + maturity premium

In our example, assuming that Lola has computed 6% as total of all components except for inflation premium, so total she should charge 11% (6% + 5% inflation premium).

*Inflation premium pays off for expected inflation over the period of loan.

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Answer:

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Explanation:

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