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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 Preview

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

    k = required return on a debt ...

    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.