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Real risk-free rate of return

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You read in The Wall Street Journal that 30-day T- bills are currently yielding 5.5%. 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

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

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

Solution Summary

Calculates real risk-free rate of return.

$2.19