If Treasury bills are currently paying 5.85 percent and the inflation rate is 2.6 percent, what is the approximate and the exact real rate of interest? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e. g., 32.16.)

Given Data:  

Interest Rate = 5.85 %

Inflation Rate = 2.6 %

Approximate real rate of interest?

Exact real rate of interest?

approximate real rate of interest = 3.25%  

exact real rate of interest = 3.17%

Explanation:

Nominal Interest Rate:

The normal interest rate that you pay on a loan.  

Real Interest Rate:

This is the interest rate after subtracting the inflation rate from the nominal interest rate.

Nominal and Real Interest Rate are related as:  

Real Interest Rate = Nominal Interest Rate - Inflation Rate

Note: It is also known as fisher equation

Approximate Real Rate of Interest = 5.85% - 2.6% = 3.25%

Exact Real Rate of Interest = (1 + 0.0585)/(1 + 0.026) = 1.03167 = 3.17%

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