Question

Problem 9

Intro

The interest rate (yield) on Treasury bonds is 4.7% and the expected inflation rate is 1.2%.

Part 1

What is the approximate real rate of interest rate?

Part 2

What is the exact real rate of interest rate?

Answer 1

Approximate Real Return = Nominal Return - Inflation Rate
Approximate Real Return = 4.70% - 1.20%
Approximate Real Return = 3.50%

Exact Real Return = (Nominal Return - Inflation Rate) / (1 + Inflation Rate)
Exact Real Return = (0.0470 - 0.0120) / (1 + 0.0120)
Exact Real Return = 0.0350 / 1.0120
Exact Real Return = 0.0346 or 3.46%