Answer
"Pure rate of Interest": This element ranges between 2 and 4%.It comprises the interest rate that would be charged in situations where a lender is sure that the borrower will not default or in situations where inflation is not expected.
“Expected inflation rate of interest”: Refers to the rate which caters to the decline in purchasing power. Interest rates increase when there are expectations of high inflation rates.
"Credit risk rate of interest": This component caters to the risk of failing to pay. Credit risks could be higher or lower, subject to the profitability or financial standing of a business.
Work Step by Step
"Pure rate of Interest": This element ranges between 2 and 4%.It comprises the interest rate that would be charged in situations where a lender is sure that the borrower will not default or in situations where inflation is not expected.
“Expected inflation rate of interest”: Refers to the rate which caters to the decline in purchasing power. Interest rates increase when there are expectations of high inflation rates.
"Credit risk rate of interest": This component caters to the risk of failing to pay. Credit risks could be higher or lower, subject to the profitability or financial standing of a business.
