Question

Suppose 1-year T-bills currently yield 7.00% and the future inflation rate is expected to be constant at 2.00% per year. What is the real risk-free rate of return, r*

Answer 1

Real risk-free rate of return = 5.00%

Step-by-step explanation:

r* = T-Bill yield - IP

Real risk-free rate of return = T-bills currently yield - Inflation rate

Real risk-free rate of return = 7.00% - 2.00%

Real risk-free rate of return = 5.00%