Question

You are offered an investment that will pay a nominal rate of 10% per year. If...

You are offered an investment that will pay a nominal rate of 10% per year. If the inflation rate is 3%, what is the exact real rate of return?

Select one:

a. 7.00%

b. 6.95%

c. 7.05%

d. 6.80%

e. None of the above.

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Answer #1

Ans d. 6.80%

Real Rate of Return = ( 1 + Nominal Return) / (1 + Inflation Rate) - 1
                             = ( 1 + 10%) / (1 + 3%) - 1
                             = 6.80%
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