(Real

interest rates: approximation

method)

The CFO of your firm has asked you for an approximate answer to this question: What was the increase in real purchasing power associated with both 3-month Treasury bills and 30-year Treasury bonds? Assume that the current 3-month Treasury bill rate is

5.26

percent, the 30-year Treasury bond rate is

7.71

percent, and the inflation rate is

2.09

percent. Also, the chief financial officer wants a short explanation should the 3-month real rate turn out to be less than the 30-year real rate.

The inferred real interest rate of Treasury bills is

%.

(Round to two decimal places.)The inferred real interest rate of Treasury bonds is

%.

(Round to two decimal places.)

Should the 3-month real interest rate turn out to be less than the 30-year real interest rate?(Select the best choice below.)

A.

Yes, the 30-year real interest rate should exceed the 3-month real interest rate because of the maturity premium demanded by investors.

B.

Yes, the 30-year real interest rate should exceed the 3-month real interest rate because the two securities are sold in different markets.

C.

Yes, the 30-year real interest rate should exceed the 3-month real interest rate because inflation only affects the long-term security.

D.

Yes, the 30-year real interest rate should exceed the 3-month real interest rate because the goverment demands lower rates for lending short term