Question

You observe that the inflation rate in the United States is 3.3 percent per year and that T-bills currently yield 3.8 percent annually.

  

Required:

(a)	What do you estimate the inflation rate to be in Australia, if short-term Australian government securities yield 5.5 percent per year?
	(Click to select)  4.8%  5%  5.2%  -1.6%  1.61%

  

(b)	What do you estimate the inflation rate to be in Canada, if short-term Canadian government securities yield 7.5 percent per year?
	(Click to select)  6.72%  0.4%  7.28%  7%  -0.4%

  

(c)	What do you estimate the inflation rate to be in Taiwan, if short-term Taiwanese government securities yield 11 percent per year?
	(Click to select)  10.92%  3.9%  10.5%  10.08%  -3.9%

Answer 1

The following relationship can be represented for the real risk free rate, inflation and T-Bill:

T Bill rate =risk free rate+Inflation rate

T Bill rate = 3.8%

Inflation rate= 3.3%

Hence:

3.8%= risk free rate+3.3%

isk free rate = 0.5%

The risk free rate is same for all countries hence:

a) For Australia:

T Bill Rate=risk free rate+Inflation

T-Bill rate = 5.5%

Real risk free rate=0.5%

5.5%=0.5%+Inflation rate

Inflation rate = 5 %

b) For Canada:

T Bill Rate= risk free rate+Inflation

T bill rate = 7.5%

Real risk free rate=0.5%

7.5%=0.5%+Inflation rate

Inflation rate = 7%

c) For Taiwan:

T Bill Rate=risk free rate+Inflation

T-Bill rate = 11%

Real risk free rate=0.5%

11%=0.5%+Inflation rate

Inflation rate = 10.5%