Discussion Question
It is commonly held that the "real" rate is the difference between the inflation rate and the nominal rate of interest, on investments of negligible risk. Given these data on a number of "nominal" interest rates, use the above definition to calculate the "real" discount rate for the years 1940-1998, based on the assets with the lowest risk (in this case, the "prime" rate). Then calculate the implied risk premium associated with the other assets.
Data Set
Inflation rate, Prime rate, and Baa bond rate, 1940-1998
Source: Economic Report of the President (http://w3.access.gpo.gov/usbudget/fy2000/erp.html) and Economagic.com (http://www.economagic.com/em-cgi/data.exe/var/inflation-cpiu-dec2dec)
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