Question

Nominal rate of return on a bond for a year is 7.28 percent and inflation during the year was 3.09 percent. What is the real rate of return on the bond for the year using the exact relation between nominal rates, real rates and inflation?

Answer 1

The real rate of return is computed as shown below:

(1 + Nominal rate of return) = (1 + real rate of return) x (1 + inflation rate)

1.0728 = (1 + real rate of return) x 1.0309

(1.0728 / 1.0309) - 1 = real rate of return

4.06% Approximately = real rate of return

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