Question

Ai Lun, a management trainee at a large New York based bank, is trying to estimate the real rate of return expected by investors. He notes that the 3-month T-bill currently yields 3 percent, and consumer prices have been rising steadily at a 2% rate for several years. What should Ai Lun's estimate of the real rate be? a) 5% b) 1% c) 3% d) 2%

Answer 1

Answer:

option B

Step-by-step explanation:

given,                                              

3-month T-bill currently yields  = 3%          

customer price have been rising = 2% rate

Ai Lun's estimate of the real rate = ?            

real rate return                                                  

                       = $\dfrac{1 + risk\ free\ rate}{1 +inflation\ rate} - 1$

                       = $\dfrac{1 + 0.03}{1 +0.02} - 1$

                       = $\dfrac{1.03}{1 .02} - 1$

                       = $1.0098 - 1$

                       = 0.0098

                       = 0.98 % ≅ 1 %

hence, the correct answer is option B