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An analyst is evaluating securities in a developing nation where the inflation rate is very high. As a result, the analyst has been warned not to ignore the cross-product between the real rate and inflation. A 6-year security with no maturity, default, or liquidity risk has a yield of 20.84%. If the real risk-free rate is 6%, what average rate of inflation is expected in this country over the next 6 years?

Verified Answer :

Thank you for posting your question here at brainly. The real risk-free rate is 6%, what average rate of inflation is expected in this country over the next 6 years is 1.266.  If the risk-free rate is 5% and expected inflation rate is 16%, that would result in a total rate of 21%. Then divide 1 by 0.79 = 1.266. Therefore, my answer is a yield of 26.6% is required.

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