Question

Under what situations are you likely to see negative real rates of return?
A. Nominal rates > real rates

b. inflation > nominal rates

c. nominal rates=real rates

d. inflation > real rates

e. nominal rates > inflation

Answer 1

Ans:- Real return is given by (1 + Nominal Rate ) / (1 + Inflation ) - 1

For the real rate to be negative denominator has to be greater than numerator that means Inflation has to be greater than the Nominal rate only then the real return would be negative.

For example lets take Nominal rate = 6% and Inflation = 7%, then Real return

= (1 + 0.06 ) / (1 + 0.07 ) - 1 = -0.93%, For any inflation rate which is less than or equal to 6% real return would not be negative and for any values which above nominal rate real rate would be negative.

Therefore, for a real return to be negative Inflation > Nominal rates. option (b) is the right answer.

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