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​(Real interest​ rates: approximation method​) The CFO of your firm has asked you for an approximate...

​(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 5.02 ​percent, the​ 30-year Treasury bond rate is 8.25 ​percent, and the inflation rate is 2.26 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 ____%. (Round to two decimal​ places.)

The inferred real interest rate of Treasury bonds is ____%.c​(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 the two securities are sold in different markets.

B. ​Yes, the​ 30-year real interest rate should exceed the​ 3-month real interest rate because inflation only affects the​ long-term security.

C. 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.

D. ​Yes, the​ 30-year real interest rate should exceed the​ 3-month real interest rate because of the maturity premium demanded by investors.

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Answer #1

The inferred real interest rate for 3-month Treasury bill =

ANS : 3-month Treasury bill – Inflation rate = 5.02% - 2.26%=2.76%

The inferred real interest rate for 30-year Treasury bond =

ANS : 30-year Treasury bond – Inflation rate = 8.25% - 2.26%=5.99%

Should the​ 3-month real interest rate turn out to be less than the​ 30-year real interest​ rate? 

ANS :D. ​Yes, the​ 30-year real interest rate should exceed the​ 3-month real interest rate because of the maturity premium demanded by investors.

EXPLANATION : The real interest rate for 3-month Treasury bond is less than the 30 year Treasury bill because the length of time of the investment is high in case of 30 years in comparison to 3 month & so as high risk is taken, the real rate has to be higher for 30 year treasury bond & lower for 3 month treasury bond

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