To solve this problem, we need to understand that the risk-free rate is composed of several components:

The nominal interest rate is typically calculated as the sum of the real rate of interest, the inflation premium, and the default risk premium:

$\text{Nominal Rate} = \text{Real Rate} + \text{Inflation Premium} + \text{Default Risk Premium}$

In this case, however, we want to find the risk-free rate, which is generally considered to be the sum of the real rate of interest and the inflation premium, without the default risk premium.

Given:

• Real Rate of Interest = 0.5%
• Inflation Premium = 9.3%
• Default Risk = 3.6%

Formula for the Risk-Free Rate:

$\text{Risk-Free Rate} = \text{Real Rate} + \text{Inflation Premium}$

Calculation:

$\text{Risk-Free Rate} = 0.5\% + 9.3\% = 9.8\%$

Therefore, the risk-free rate is 9.8%.

Would you like a more detailed explanation, or do you have any further questions?

Follow-up Questions:

1. What is the difference between the nominal interest rate and the real interest rate?
2. How does inflation impact the risk-free rate?
3. What factors contribute to the default risk premium?
4. Why is the risk-free rate an important concept in finance?
5. How would the risk-free rate change if inflation expectations change?

Tip: Remember that the risk-free rate is a theoretical concept and usually refers to government bonds in stable economies.