1 Suppose the riskfree nominal interest rate on a 1year Cana

1. Suppose the risk-free nominal interest rate on a 1-year Canadian Treasury bill (T-bill) is 6% per year, and the expected rate of inflation is 4% per year. What is the expected real rate of return on the T-bill?

Solution

Real rate of return = (1+ Nominal Rate)/(1+Inflation) – 1

Real rate of return = (1+6%)/(1+4%) – 1 = 1.0192 – 1 = 1.92%