Question

If you borrow $10,000 from a bank for one year at a nominal interest rate of 5.1%, and the inflation over the year is 3%, what is the real interest rate you are paying? Please round to one decimal place.

Answer 1

The real interest rate paid on a $10,000 loan with a nominal interest rate of 5.1% and an inflation rate of 3% is 2.1%, rounded to one decimal place.

Step-by-step explanation:

To calculate the real interest rate you are paying, you need to adjust the nominal interest rate by the rate of inflation. The nominal interest rate is 5.1% and the inflation rate is 3%. The formula to find the real interest rate is:

Real Interest Rate = Nominal Interest Rate - Inflation Rate

Now, let's put the values into the formula:

Real Interest Rate = 5.1% - 3% = 2.1%

Thus, the real interest rate you are paying on a $10,000 loan over the span of one year is 2.1%, when rounded to one decimal place.

It's important to consider the real interest rate as it reflects the actual cost of borrowing money once inflation is accounted for. Ignoring this can lead to misunderstandings about the cost of a loan, particularly in periods of high inflation.