Ai Lun, a management trainee at a large New Yorkdashbased bank, is trying to estimate the real rate of return expected by investors. He notes that the 3dashmonth Tdashbill currently yields 3 percent, and consumer prices have been rising steadily at a 2% rate for several years. What should Ai Lun's estimate of the real rate be?

Question

Derick Cisneros

Business

8 July, 13:04

Ai Lun, a management trainee at a large New Yorkdashbased bank, is trying to estimate the real rate of return expected by investors. He notes that the 3dashmonth Tdashbill currently yields 3 percent, and consumer prices have been rising steadily at a 2% rate for several years. What should Ai Lun's estimate of the real rate be?

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Answers (1)

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Kyra Mendez · Answer 1

Ai Lun estimate that real rate would be 1%

Explanation:

The Formula for the Real Rate of Return is

Real rate of return = Nominal interest rate - Inflation rate

In this case,

Nominal interest rate = 3%

Inflation rate is given by the rising of the consumer prices = 2%

So,

Real rate of return = 3% - 2%

Real rate of return=1%