You can buy a Treasurybill for 9880 and in three months the

You can buy a Treasury-bill for $98.80, and in three months the T-bill pays you $100. What is the 3-month Nominal Risk-Free Rate? Express your answer as a percentage; for example, 3.18% should be entered as 3.18 without the percentage sign.

Solution

Amount paid now = $98.80

Amount received after 3 months $100

Dollar return in 3 monthss = $100 - $98.80 = $1.20

Percentage return for 3 months = $1.20 / $98.80 = 0.0121 = 1.21%

3-month nominal risk free rate = 1.0121⁴ - 1 = 4.95%