Question

During 2013 I had $10,000 invested in a Certificate of Deposit. The CD earned an annual return of 2%. Inflation, however, was 3.5% during that time. What was my real rate of return?

Group of answer choices

2%

3.5%

5.5%

-1.5%

Answer 1

Real Rate of Return is a rate of return on investment that is adjusted for inflation. However Nominal Rate of Return is a rate of return on investment that is not adjusted for inflation.

Real Rate of Return is calculated as :

( 1 + Real Rate ) = (1 + Nominal Rate ) / ( 1 + Inflation )
( 1 + Real Rate ) = ( 1 + 0.02 ) / ( 1 + 0.035 )
( 1 + Real Rate ) = 1.02 /1.035
Real Rate = 0.9855 - 1
Real Rate = -0.0145
Real Rate = -1.5%

Ans :  Real Rate = -1.5%