You are considering investing money in Treasury bills and wondering what the real risk-free rate of interest is. Currently, Treasury bills are yielding 4.3% and the future inflation rate is expected to be 2.5% per year. Ignoring the cross product between the real rate of interest and the inflation rate, what is the real risk-free rate of interest?

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Effective Interest Rate

The term interest rate can be defined as the amount that is charged by the lender as a percentage on the principal amount. Interest rate which is charged annually is known as annual percentage rate.