Final answer:
The real rate of return on a bond paying a 2.5% fixed interest rate with a 2.8% inflation rate is -0.3%, reflecting a loss in purchasing power.
Step-by-step explanation:
The question asked is: If a one-year bond pays a fixed interest rate of 2.5% per year and this year's inflation rate is 2.8%, what is your real rate of return?
If a one-year bond pays a fixed interest rate of 2.5% per year and this year's inflation rate is 2.8%, your real rate of return would be the nominal interest rate minus the inflation rate, which can be calculated as 2.5% - 2.8% = -0.3%. This means that in real terms, accounting for inflation, you're actually losing purchasing power on this investment. The concept is important in finance since it indicates how much an investment's return is eroded by inflation.