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Problem 7-12 Calculating Real Rates of Return [LO4] Treasury bills are currently paying 7 percent and...

Problem 7-12 Calculating Real Rates of Return [LO4]

Treasury bills are currently paying 7 percent and the inflation rate is 3.2 percent.

What is the approximate real rate of interest? (Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
  Approximate real rate %

What is the exact real rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
  Exact real rate %
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Answer #1

ANSWER 



Approximate real rate

= Treasury rate - Inflation rate

= 7% - 3.2%

= 3.8% (ANSWER).



Exact real rate 

= (1 +Treasury rate) / (1 + inflation rate) - 1

= (1 + 0.07) / (1 + 0.032) - 1

= 0.0368

= 3.68%  (ANSWER).

answered by: Tulsiram Garg
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