Question

You read in The Wall Street Journal that 30-day T-bills are currently yielding 5.5%. Your brother-in-law, a broker at Safe and Sound Securities, has given you the following estimates of current interest rate premiums:

Inflation premium = 3%

Liquidity premium = 1.1%

Maturity risk premium = 2.3%

Default risk premium = 2.75%

On the basis of these data, what is the real risk-free rate of return? Round your answer to two decimal places.

Answer 1

Real risk free rate = nominal rate of tbill -inflation premia = 5.5-3 = 2.5%