Answer:
A. 2.10%
Explanation:
Treasury nods yield includes the real risk free rate, Inflation premium and maturity risk premium as well.
Treasury Bonds Yield = Real Risk free rate + Inflation premium + Maturity risk premium
4.4% = Real Risk free rate + 1.9% + 0.4%
4.4% = Real Risk free rate + 2.3%
Real Risk free rate = 4.4% - 2.3%
Real Risk free rate = 2.1%
Answer:
A. 2.10%
Explanation:
The risk-free rate can simply be described as the interest or rate of return that is expected by be paid on an absolutely risk-free investment to an investor over a given time period.
The real risk-free rate (r*) is estimated by deducting the summation of the inflation premium (IP) and the maturity risk premium (MRP) from the yield to maturity (YTM). That is,
r* = YTM – (IP + MRP) …………………………………….. (1)
Substituting for the respective values in the question into equation (1), we have:
r* = 4.4% – (1.9% + 0.4%) = 4.4% – 2.3% = 2.1%
Therefore, the real risk-free rate, r*, is 2.1%.
