Question

While analyzing a growing annuity, you need to express the interest rate, the future value, and the payment in real and not nominal terms.

0 False

0    True

You invested in an aggressive growth fund and expect to earn 12.72% annually over the next five years. However, due to strong growth, inflation is expected to be 6.30%. What should be your expected real rate of return?

0	6.64%
0	4.53%
0	7.25%
0	6.04%

Answer 1

1)

True:

A growing annuity is an amount that grows each period at the same rate. Growing annuity needs to adjusted for inflation and are thus expressed in real terms.

2)

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

Real rate = [(1 + 0.1272)/(1 + 0.063)] - 1

Real rate = 1.0604 - 1

Real rate = 0.0604 or 6.04%