Question

9. An investor purchased a 1‐year Treasury security
with a promised yield of 10 percent. The investor
expected the annual rate of inflation to be 6 percent;
however, the actual rate turned out to be 10 percent.

What were the expected and the realized real rates of
return for the investor?

Please explain.

Answer 1

Expected Real Rate of Return =((1 + Expected Return) / (1 + Inflation Rate)) - 1

= ((1 + 0.10) / (1 + 0.06)) - 1  

= 1.03773584905 - 1

= 3.77%

Realised Real Rate of Return =((1 + Realised Return) / (1 + Inflation Rate)) - 1

= ((1 + 0.10) / (1 + 0.06)) - 1  

= 1.03773584905 - 1

= 3.77%

Both will be same as Promised and Realised Return are same.

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