Problem:
Suppose 1-year T-bills currently yield 7.00% and the future inflation rate is expected to be constant at 3.20% per year.
Required:
Question: What is the real risk-free rate of return, r*? The cross-product term should be considered, i.e., if averaging is required, use the geometric average.
a. 3.87%
b. 4.06%
c. 4.26%
d. 4.48%
e. 3.68%
Note: Show supporting computations in good form.