Treasury bills are currently paying 4.6 percent and the inflation rate is 1.9 percent. a. What is the approximate real rate of interest? (Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the exact real rate? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. Approximate real rate % b. Exact real rate %
Treasury bills are currently paying 4.6 percent and the inflation rate is 1.9 percent. a. What is the approximate real rate of interest? (Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the exact real rate? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. Approximate real rate % b. Exact real rate %
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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![**Understanding Treasury Bills: Real Rate of Interest**
**Treasury bills are currently paying 4.6 percent and the inflation rate is 1.9 percent.**
**a. What is the approximate real rate of interest?**
(*Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.*)
**b. What is the exact real rate?**
(*Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.*)
| a. Approximate real rate | _______ % |
|:------------------------:|----------|
| b. Exact real rate | _______ % |
### Explanation:
To determine the real rate of return or interest, which accounts for inflation, we have two methods: the approximate method and the exact method.
1. **Approximate Real Rate Calculation:**
The approximate real rate can be found using the formula:
\[
\text{Approximate Real Rate} \approx \text{Nominal Rate} - \text{Inflation Rate}
\]
2. **Exact Real Rate Calculation:**
The exact real rate can be calculated using the formula:
\[
\text{Exact Real Rate} = \frac{1 + \text{Nominal Rate}}{1 + \text{Inflation Rate}} - 1
\]
Here, the rates need to be in decimal form before doing the calculations.
These calculations help in understanding the purchasing power growth taking into account inflation.
*Note: Fill in your calculated values in the provided table's blank spaces.*](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F0505985e-243e-4b9e-b7a6-bbe3450b2962%2Fc02487be-eb0f-45f3-b7d3-e084b6170a85%2Fbe8o6dc_processed.jpeg&w=3840&q=75)
Transcribed Image Text:**Understanding Treasury Bills: Real Rate of Interest**
**Treasury bills are currently paying 4.6 percent and the inflation rate is 1.9 percent.**
**a. What is the approximate real rate of interest?**
(*Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.*)
**b. What is the exact real rate?**
(*Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.*)
| a. Approximate real rate | _______ % |
|:------------------------:|----------|
| b. Exact real rate | _______ % |
### Explanation:
To determine the real rate of return or interest, which accounts for inflation, we have two methods: the approximate method and the exact method.
1. **Approximate Real Rate Calculation:**
The approximate real rate can be found using the formula:
\[
\text{Approximate Real Rate} \approx \text{Nominal Rate} - \text{Inflation Rate}
\]
2. **Exact Real Rate Calculation:**
The exact real rate can be calculated using the formula:
\[
\text{Exact Real Rate} = \frac{1 + \text{Nominal Rate}}{1 + \text{Inflation Rate}} - 1
\]
Here, the rates need to be in decimal form before doing the calculations.
These calculations help in understanding the purchasing power growth taking into account inflation.
*Note: Fill in your calculated values in the provided table's blank spaces.*
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