You are considering investing money in Treasury bills and wondering what the real risk-free rate of...
You are considering investing money in Treasury bills and wondering what the real risk-free rate of interest is. Currently, Treasury bills are yielding 7.0%
and the future inflation rate is expected to be 4.5% per year. Ignoring the cross product between the real rate of interest and the inflation rate, what is the real risk-free rate of interest?
The real risk-free rate of interest is _% round to one decimal place
Homework Answers
SOLUTION :
We need to find out the approximate real rate , since product of treasury rate and inflation rate is ignored.
Approximate real rate
= Treasury bill rate - Inflation rate
= 7% - 4.5%
= 2.5 (ANSWER).
The real risk-free rate of interest = Treasury yield - Inflation rate
= 7.0 - 4.5
= 2.5% Answer
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