Q4 Why is option A is correct
We cannot assume any T bills as inflation protected until and unless it is specified
So why we assume here that the T bill yeild is nominal risk free rates
it should only be assumed as nominal risk free rate when its specified that T bill is inflation protected na?
Correct me if I’m wrong
Yes you are correct if there is inflation protection it has to be mentioned.
But if you check the other two options they are totally wrong so option elimination is the only way. I think the institute also has framed the question with the same mindset.
You are wrong
If it is inflation protected that means we dont need to worry about the risk of inflation so the rate rate will be real rate of interest
Only if it is not inflation Protected then we require higher rate of return(inflation premium) to take the risk of inflation, so we call it nominal rate of return.
Is this the assumption because it’s not specified anywhere in the question that the said Tbill is inflation protected ?