Suppose the real rate is 3.75 percent and the inflation rate is 1.5 percent. What rate would you expect to see on a Treasury bill?

Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.

To find the expected nominal interest rate on a Treasury bill, we can use the **Fisher equation**:

\[
(1 + \text{nominal rate}) = (1 + \text{real rate}) \times (1 + \text{inflation rate})
\]

Given:
- Real rate = 3.75% = 0.0375
- Inflation rate = 1.5% = 0.015

Let's plug these values into the equation and solve for the nominal rate:

\[
(1 + \text{nominal rate}) = (1 + 0.0375) \times (1 + 0.015)
\]

\[
(1 + \text{nominal rate}) = 1.0375 \times 1.015
\]

\[
(1 + \text{nominal rate}) = 1.053063
\]

Now, subtract 1 to isolate the nominal rate:

\[
\text{nominal rate} = 1.053063 - 1 = 0.053063
\]

Convert this to a percentage:

\[
\text{nominal rate} = 5.31\%
\]

Thus, the expected nominal rate on the Treasury bill would be **5.31%**.

Would you like further details or have any questions?

Here are five related questions to deepen your understanding:
1. What is the relationship between the real interest rate and inflation?
2. How does the Fisher equation apply to longer-term bonds?
3. How would a change in the inflation rate affect the nominal interest rate?
4. How can inflation expectations influence Treasury bill yields?
5. How does the nominal rate differ from the effective interest rate?

**Tip:** Always distinguish between real and nominal rates when analyzing financial instruments, as inflation can significantly affect the purchasing power of returns.

Suppose the real rate is 3.75 percent and the inflation rate is 1.5 percent. What rate would you expect to see on a Treasury bill? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.

Discover how to calculate the nominal interest rate on a Treasury bill with a real rate of 3.75% and an inflation rate of 1.5%. Using the Fisher equation, this example provides a step-by-step solution, rounding the final answer to 5.31%. Ideal for undergraduate finance or economics students.

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