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Calculating the Real Risk-Free Rate of Return

You read in the Wall Street Journal that 30-day T-bills are currently yielding 5.55. your brother-in-law, a broker at Safe and Sound Securities, has given you the following estimates of current interest rate premiums:
Inflation premium=3.25%
Liquidity premium=0.6%
Maturity risk premium=1.8%
Default risk premium=2.15%

On the basis of these data, what is the real risk-free rate of return?

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Solution Preview

The determinants of interest rates are:

k = k* + IP + LP + MRP + DRP
k = required return on a debt ...

Solution Summary

This solution calculates the real risk-free rate of return is with the given inflation premium, liquidity premium, maturity risk premium and default risk premium.