Question

P6-1 (book/static) Question Help Interest rate fundamentals: The real rate of return Carl Foster, a trainee at an investment banking firm, is trying to get an idea of what real rate of return investors are expecting in today's marketplace. He has looked up the rate paid on 3-month U.S. Treasury bills and found it to be 1.5%. He has decided to use the recent rate of change in the Consumer Price Index as a proxy for the inflationary expectations of investors. That annualized rate now stands at 0.5 %. On the basis of the information that Carl has collected, what estimate can he make of the real rate of returm? The estimate of the real rate of return is%. (Round to one decimal place.)

Answer 1

The real rate of return is computed as shown below:

= [ ( 1 + 0.015 ) / ( 1 + 0.005 ) ] - 1

= 1% Approximately

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