You read in The Wall Street Joumal that 30-day T-bills are currently yielding 5

Finance Aug 12, 2020

You read in The Wall Street Joumal that 30-day T-bills are currently yielding 5.8%. Your brother-in-law, a broker at Safe and Sound Securities, has given you the following estimates of current interest rate premiums: Inflation premium=3.25%. Liquidity premium=0.6%. Maturity risk premium=1.85%. Default risk premium=2.15%. On the basis of these data, what is the real risk-free rate of returne Select one: O a.5% b.2.55% c. 5.89 d. 3.25%

Expert Solution

Treasury yield = IP + Rf

5.8 = 3.25 + Rf

Rf = 2.55% Answer

The second option is correct.

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