Question

Assume that the inflation rate during the last year was 2.87 percent. US long-term bonds had the nominal rates of return of 3.81 percent. What is the real rate of return for a US long-term bond? Round the answer to two decimal places in percentage form.

Answer 1

Real rate = [(1 + nominal rate) / (1 + inflation rate)] - 1

Real rate = [(1 + 0.0381) / (1 + 0.0287)] - 1

Real rate = [1.0381 / 1.0287] - 1

Real rate = 1.0091 - 1

Real rate = 0.0091 or 0.91%