1. The 11/11/2013 nominal interest rate on ten year US government bonds is 2.75%

Question

1.     The 11/11/2013 nominal interest rate on ten year US government bonds is 2.75% (source: Yahoo Finance) and inflation (consumer price index, all urban consumers, US city average, all items) is 1.18% (source: US Department of Labor). Rounded to the nearest 10th of a percent, what is the real 10-year interest rate using the actual, versus approximation, formula? (Thought of the day: does this seem like a good investment to you?)

a)     -1.55%

b)     -0.43%

c)     0.43%

d)     1.55%

e)     1.57%

f)     2.33%

g)     3.93%

Explanation / Answer

real rate is ( 1 + 0.0275 ) / ( 1 + 0.0118 ) - 1 = 0.0155

Hence

d) 1.55%

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