Nico Nelson, a management trainee at a large New York-based bank, is trying to estimate the real rate of return expected by investors. He notes that the 3-month T-bill currently yields 3 percent and has decided to use the consumer price index as a proxy for expected inflation. What is the estimated real rate of interest if the CPI is currently 2 percent?
A) 5%
B) 1%
C) 3%
D) 2%

Question

Quizplus · Accepted Answer

The real rate of interest is the nominal rate of interest minus the inflation rate. In this case, the nominal rate of interest is the 3-month T-bill yield of 3%, and the inflation rate is the CPI of 2%. Therefore, the estimated real rate of interest is 3% - 2% = 1%.

Nico Nelson, a Management Trainee at a Large New York-Based