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8/29/2020
Student: Shameka lemon
Date: 8/29/20
Week 1 Homework-Shameka lemon
Instructor: Karin Ford-Torres
Course: FINC400 I001 Sum 20
Assignment: Week 1 Homework
(Real interest rates: approximation method) You are considering investing money in Treasury bills and wondering what the real
risk-free rate of interest is
...
0% and the future inflation rate is expected to be 5
...
Ignoring the cross product between the real rate of interest and the inflation rate, what is the real risk-free rate of interest?
STEP 1: FORMULATE A SOLUTION STRATEGY
Ignoring the cross product between the real rate of interest and the inflation rate, the real risk-free rate of interest is defined as:
Real rate of interest = nominal rate of interest − inflation rate
STEP 2: CRUNCH THE NUMBERS
The real risk-free rate of interest is computed as follows:
Real rate of interest = 0
...
053 = 0
...
7%
STEP 3: ANALYZE YOUR RESULTS
The real rate of interest represents the rate of increase in your actual purchasing power after adjusting for inflation
...
7 percent
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