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6.2 You read in The Wall Street Journal that 30-day T-bills are currently yielding 4.7%. Your...

6.2

You read in The Wall Street Journal that 30-day T-bills are currently yielding 4.7%. Your brother-in-law, a broker at Safe and Sound Securities, has given you the following estimates of current interest rate premiums:

  • Inflation premium = 3.50%
  • Liquidity premium = 1.2%
  • Maturity risk premium = 1.55%
  • Default risk premium = 2.75%

On the basis of these data, what is the real risk-free rate of return? Round your answer to two decimal places.

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Answer #1

Real risk-free rate of return:

= T-bill yield - Inflation premium

= 4.7%-3.5%

= 1.20%

Hence, Real risk-free rate of return is 1.20%

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