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Assume that 1-year T-bills currently yield 5.00% and the future inflation rate is expected to be...

Assume that 1-year T-bills currently yield 5.00% and the future inflation rate is expected to be constant at 1.5% per year. What is the real risk-free rate of return, r*?

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Answer #1

Real risk free rate = Nominal rate-inflation rate

                          = 5 -1.5

                           = 3.5%

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