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3 pages/≈825 words
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APA
Subject:
Mathematics & Economics
Type:
Math Problem
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English (U.S.)
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# Inflation and Interest Rates, Real Risk-Free Rate (Math Problem Sample)

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Inflation and Interest Rates
Name
Institution
Date
Problem 1: Real Risk-Free Rate
Current 30-day T-bills are yielding 3.5 percent. Your accountant provided you with these interest rate premiums:
IP = 1.5%
LP = 0.6%
MRP = 1.8%
DFP = 2.15%
What is the real risk-free rate of return based on this data?
r = r* + IP
3.5%= r* +1.5%
r*=2%
Problem 2: Expected Interest Rate
For this problem, examine Treasury securities. Considering the following numbers, what would the yield on 3-year Treasury securities be?
Real risk-free = 4%.
Inflation expected at 1.5% for this year and 2% for the next 2 years.
r = r* + IP + MRP + DRP + LP
r=4 %.+[( 1.5) +2%*2)]/3= 5.83%
The interest rate serves as the starting point when examining the rates of investments, and the interest rate represents the probability th

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