Question

William Carter, a trainee at an investment banking firm, is trying to get an idea of             what real rate of return investors are expecting in today’s marketplace. She has looked up the rate paid on 3-month U.S. Treasury bills and found that it to be 3.45%. She     has decided to use the rate of change in the Consumer Price Index as a proxy for the       inflationary expectation of investors. That annualized rate now stands at 2.1%. On the basis of the information that Caroline has collected, what estimate can he make    of the real rate of return? SHOW ALL WORK

Answer 1

See here, they are trying to bombard you with lot of information.

here Nominal return is the return produced by the T- Bill

inflation is measured with CPI index and they had given already

Real rate of return = Nominal interest rate - Inflation rate

= 3.45% - 2.1 %

Real Return = 1.35%

Bonus:

Suppose if they asks about Inflation adjsted return use the following method

Formula: Real Return= [(1+ nominal return)/(1+ inflation return)]-1

here Nominal return is the return produced by the T- Bill

inflation is measured with CPI index and they had given already

Real Return= [(1+ 0.0345)/(1+ 0.021)]-1

Real Return = 1.32%