The nominal rate of interest is 7.12% when the inflation premium is 3% and the real interest rate is 4%.
The interest rate is a rate charged on the borrowed amount of funds by the lender. It can be a monthly interest, quarterly interest, or even annual interest.
Given values:
Real interest rate = 4%
Inflation premium = 3%
Computation of the nominal rate of interest:
[tex]\rm\ Nominal \rm\ interest \rm\ rate = \rm\ ( 1 + \rm\ real \rm\ interest \rm\ rate )\times ( 1 + \rm\ inflation \rm\ premium )-1\\\rm\ Nominal \rm\ interest \rm\ rate = ( 1 + 0.04 )\times ( 1 + 0.03 )-1\\\rm\ Nominal \rm\ interest \rm\ rate = 1.04\times ( 1.03 -1\\\rm\ Nominal \rm\ interest \rm\ rate = 0.0712\\\rm\ Nominal \rm\ interest \rm\ rate = 7.12\%\\[/tex]
Therefore, the nominal interest rate on a loan comes out to be 7.12%.
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