The closest approximation to the real, risk-free rate of interest is
A) the short-term Treasury bill rate plus the inflation rate.
B) the short-term Treasury bill rate minus the inflation rate.
C) the 10 year Treasury bond rate minus the inflation rate.
D) the 10 year Treasury bond rate minus the 1 year Treasury bill rate.

Question

Quizplus · Accepted Answer

The real, risk-free rate of interest is best approximated by taking the short-term Treasury bill rate and subtracting the inflation rate. This adjustment removes the inflation component from the nominal rate (the T-bill rate), leaving an approximation of the real rate of return that does not include the impact of inflation.

The Closest Approximation to the Real, Risk-Free Rate of Interest