Question

Suppose the real rate is 8 percent and the inflation rate is 2.8 percent. What rate would you expect to see on a Treasury bill? 

Multiple Choice 

• 9.92% 

• 12.68% 

• 12.13% 

• 9.37% 

• 1.02%

Answer 1

What rate would you expected to see on a Treasury bill?

Answer: 11.02%

Rate expected on a Treasury bill can be found out using the following formula

Rate expected on a Treasury bill       = ( ( (1+R) * (1+I) ) - 1) *100

Where,

R = Real Rate = 8%

I = Inflation Rate = 2.8%

Rate expected on a Treasury bill       = ( ( (1+R) * (1+I) ) - 1) *100

                                                            = ((1+.08) * (1+ .028)) - 1 *100

                                                            = ((1.08 *1.028) – 1) *100

                                                            =11.024%

                                                            =11.02%