?( Real interest? rates: approximation method ?) The CFO of your firm has asked
ID: 1170147 • Letter: #
Question
?(Real
interest? rates: approximation
method?)
The CFO of your firm has asked you for an approximate answer to this? question: What was the increase in real purchasing power associated with both? 3-month Treasury bills and? 30-year Treasury? bonds? Assume that the current? 3-month Treasury bill rate is
5.295.29
?percent, the? 30-year Treasury bond rate is
8.318.31
?percent, and the inflation rate is
2.822.82
percent.? Also, the chief financial officer wants a short explanation should the? 3-month real rate turn out to be less than the? 30-year real rate.
The inferred real interest rate of Treasury bills is
nothing?%.
?(Round to two decimal? places.)The inferred real interest rate of Treasury bonds is
nothing?%.
?(Round to two decimal? places.)
Should the? 3-month real interest rate turn out to be less than the? 30-year real interest? rate????(Select the best choice? below.)
A.
?Yes, the? 30-year real interest rate should exceed the? 3-month real interest rate because of the maturity premium demanded by investors.
B.
?Yes, the? 30-year real interest rate should exceed the? 3-month real interest rate because the goverment demands lower rates for lending short term.
C.
?Yes, the? 30-year real interest rate should exceed the? 3-month real interest rate because inflation only affects the? long-term security.
D.
?Yes, the? 30-year real interest rate should exceed the? 3-month real interest rate because the two securities are sold in different markets.
Explanation / Answer
Nominal rate= Real rate+inflation rate
for 3 month bill
real rate=5.29%-2.82%=2.47%
For 30 year treasury bond
Real rate=8.31%-2.82%=5.49%
It is option A since the maturity premium is higher for 30 year than 3 months
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