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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
    k = return on a debt security ...

    Solution Summary

    Calculates real risk-free rate of return.