Question

Assume the inflation rate is 3.78% APR, compounded annually. Would you rather earn a nominal return of 5.03% APR, compounded semiannually, or a real return of 2.25% APR, compounded quarterly? (Note: Be careful not to round any intermediate steps less than six decimal places.) To put these on the same basis, you must convert them both to nominal EARS The EAR for 5.03% APR, compounded semiannually is (Type your answer in decimal format. Round to six decimal places.) The nominal EAR for a real 2.25% APR, compounded quarterly is (Type your answer in decimal format. Round to six decimal places.) You would rather earn (Select from the drop-down menu.)

Answer 1

IF ANY QUERY, FEEL FREE TO ASK THEM AND GET RESOLVED Solution: 1 EAR for 5.03% APR nominal 11 (1+5.03%/2)2-1 0.050933 2 EAR for 2.25% APR real II (1+2.25%/4)4-1 0.022691 Nominal rate = = (1+real)(1+inflation) - 1 (1+0.022691)(1+3.78%) - 1 0.061349 Hence, you would rather earn a real rate of 2.25% APR compounded quarterly.