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Risk free real rate of return

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What is the risk free real rate of return?

1) You read in the Wall Street Journal that 30 day U.S. treasury bills are currently yielding 8%. Your brother in law, a broker, and a broker at Kyoto Securities, has given you the following estimates of current interest rate premiums:

Inflation premium = 5.0%
Liquidity premium = 1.0%
Maturity risk premium = 2.0%
Default risk premium = 2.0%

Based on the data, what is the risk free real rate of return?

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Solution Summary

Computes the risk free real rate of return when data on inflation premium, liquidity premium, maturity risk premium and default risk premium are given.

Solution Preview

The determinants of interest rates are:
k = k* + IP + DRP + LP + MRP

where
k = required return on a debt ...

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