Question

if treasury bills are currently paying 9.44 percent and the inflation rate is 5.21 percent, what are the approximate and the exact real rate of interest in percent?

Answer 1

a. Approximate real rate of interest   4.23%

b. Exact real rate of interest          2.78%

a. Calculations to determine the approximate real rate of interest in percent.

Using this formula

Approximate real rate of interest=Risk free rate - Inflation rate

Let  plug in the formula

Approximate real rate of interest = 9.44% - 5.21%

Approximate real rate of interest = 4.23%

b. Calculations to determine the exact real rate of interest in percent

Using this formula

Exact real rate of interest= (Risk free rate-inflation) / (1+inflation)

Let plug in the formula

Exact real rate of interest= (9.44% - 5.21%) / (1 + 5.21%)

Exact real rate of interest=4.23% / 1.521%

Exact real rate of interest= 2.78%

Inconclusion:

a. Approximate real rate of interest   4.23%

b. Exact real rate of interest          2.78%

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