Question

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?

Answer 1

Answer:

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%