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 4.89 ?percent, the? 30-year Treasury bond rate is 8.12 ?percent, and the inflation rate is 2.89 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.)

Answer 1

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

3-month Treasury bill – Inflation rate = 4.89% - 2.89%=2%

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

30-year Treasury bond – Inflation rate = 8.12% - 2.89%=5.23%

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