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13 July, 13:58

You are considering investing money in Treasury bills and wondering what the real risk-free rate of interest is. Currently, Treasury bills are yielding 6.5 % and the future inflation rate is expected to be 3.1 % per year. Ignoring the cross product between the real rate of interest and the inflation rate, what is the real risk-free rate of interest?

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Answers (1)
  1. 13 July, 14:57
    0
    3.4%

    Explanation:

    Data provided in the question:

    Normal rate of return = 6.5%

    Expected Inflation rate = 3.1 %

    Now,

    The real risk-free rate of interest is given as

    Real risk-free rate of interest = Normal rate of return - Expected Inflation rate

    Therefore,

    Real risk-free rate of interest = 6.5% - 3.1%

    or

    Real risk-free rate of interest = 3.4%
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