The pure rate of interest is 4 percent. Investors require an inflation premium is 2.5 percent and a risk premium of 3 percent to invest in the stock of a company. What is the real rate?

The real rate of interest is the rate of return on an investment after taking into account inflation. In this case, the pure rate of interest is 4 percent, and investors are requiring an inflation premium and a risk premium to invest in the stock of a company. The inflation premium is 2.5 percent, while the risk premium is 3 percent. When taken together, these two premiums add up to 5.5 percent (2.5 + 3 = 5.5). Subtracting this from the pure rate of interest gives us an estimated real rate of -1.5 percent (-4 – 5.5 = -1.5). This means that when investing in this particular company’s stock, investors can expect to receive approximately 1.5 percent less return than they would if there were no premiums involved due to factors such as inflation or risk associated with the investment.

This real rate can be used by potential investors in order to determine whether or not it will be worth investing in this company’s stock given current market conditions and their own individual goals for returns on investments made. Additionally, companies may use this information to decide how much money they should be willing to pay out in dividends/interest payments as well as set prices for their products/services based off expected consumer demand levels related to affordability & perceived value balances given current market rates.