You read in The Wall Street Journal that 30-day T-bills are currently yielding 5 percent. Your brother-in-law, a broker at Kyoto Securities, has given you the following estimates of current interest rate premiums: show work
Inflation premium = 3%.
Liquidity premium = 1%.
Maturity risk premium = 0.5%.
Default risk premium = 0.5%.
On the basis of these data, the real risk-free rate of return is
a. 0%
b. 1%
c. 2%
d. 3%
e. 4%