Suppose 1-year T-bills currently yield 7.00% and the future inflation rate is expected to be constant...

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Suppose 1-year T-bills currently yield 7.00% and the future inflation rate is expected to be constant...

Suppose 1-year T-bills currently yield 7.00% and the future inflation rate is expected to be constant at 6.00% per year. What is the real risk-free rate of return, r*? Disregard any cross-product terms, i.e., if averaging is required, use the arithmetic average.

a. 0.85%

b. 1.00%

c. 0.97%

d. 0.82%

e. 1.15%

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Answer 1

Answer #1

b. 1.00%

Real risk-free rate of return = 1-year T-bill rate - Inflation = 7.00% - 6.00% = 1.00%

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Answer 2

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