A theorem on interest rate differentials, risk and anticipated inflation

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Abstract
This paper develops a theorem to the effect that the difference in nominal interest rates between two securities of the same maturity but different risk is an increasing linear function of the anticipated rate of inflation. Even when society's inflationary. A preliminary attempt is made to estimate the real risk premiums that finance paper, bankers's, acceptances, commercial paper, certificates of deposit, and Eurodollar deposits command over treasury bills. It is found, for example, that the real risk premium commanded by bankers’ acceptances over treasury bills is five basis points. This means that in a non-inflationary environment, bankers' acceptances would yeild five basis points more than treasury bills. This estimate and the other estimates obtained are not implausiable, but they are probably minimum estimates because of bias in the estimate of inflationary expectations.

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