Nominal Rate Inflation Rate Approximate Real Rate True Real Rate
11.0% 6.5%
9.0% 3.0%
18.0% 13.0%
5.0% 6.0%
From 1991 to? 2000, the U.S. economy had an annual inflation rate of around 2.45?%.The historical annual nominal?risk-free rate for this same period was around 5.06?%.Using the approximate nominal interest rate equation and the true nominal interest rate? equation, compute the real interest rate for that decade.
Estimate the default premium and the maturity premium given the following three investment? opportunities: a Treasury bill with a current interest rate of 2.5?%; a Treasury bond with a? twenty-year maturity and a current interest rate of 5.5?%; and a? AAA, corporate bond with a? twenty-year maturity and an interest rate of 9?%.