John loaned a friend $10,000 at 12% interest, compounded annually. The loan will be paid in...
John loaned a friend $10,000 at 12% interest, compounded annually. The loan will be paid in four equal end-of-year payments. John expects the inflation rate to be 2%. After taking inflation into account, what rate of return is John receiving on the loan?
Homework Answers
The nominal rate of interest is given as 12%. The inflation rate is 2%. We need to calculate the real interest rate.
The real interest rate is the interest rate adjusted for inflation. It can be calculated by the following formula:
Real Interest Rate = Nominal Interest Rate - Rate of Inflation
Real Interest Rate = 12% - 2% = 10%.
So, after taking inflation into account, John is receiving 10% rate of interest on the loan.
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