Question

5-year Treasury bonds yield 6.1%. The inflation premium (IP) is 1.9%, and the maturity risk premium (MRP) on 5-year T-bonds is 0.4%. There is no liquidity premium on these bonds. What is the real risk-free rate, r*

Answer 1

3.20 is the real risk-free rate

What is risk-free rate?

The risk-free rate of return, commonly abbreviated as the risk-free rate, is the rate of return on a hypothetical investment with scheduled payments over a set period of time that is assumed to meet all payment obligations.

Subtract the inflation rate from the yield on the Treasury bond that corresponds to the duration of your investment to calculate the real risk-free rate.

The risk-free rate determines the return an investor can expect from an investment over a specified time period. A risk-free rate is calculated by deducting the current inflation rate from the total yield of the treasury bond that corresponds to the investment duration.

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