Question

With no inflation, a bank would be willing to lend a business firm $5 million at an annual interest rate of 6%. But if the rate of inflation was anticipated to be 4%, the bank would most likely charge the firm an annual interest rate of:

Answer 1

Answer:

10.24%

Explanation:

The computation of the firm an annual interest is shown below:

= {(1 + annual interest rate) × (1 + inflation rate) - 1}

= {(1 + 6%) × (1 + 4%) - 1}

= (1.06 × 1.04) - 1

= 1.1024 - 1

= 10.24%

All other information which is given is not relevant. Hence, ignored it

We simply multiply the annual interest rate and the rate of inflation and than subtract it by 1 so that the accurate annual interest rate can come.