Question

A bond that pays interest annually yielded 6.01 percent last year. The inflation rate for the same period was 3 percent. Given that information, the actual real rate of return on this bond for last year was _____percent.

Answer 1

2.3%

Explanation:

The computation of the actual real rate of return is shown below:-

Actual real rate of return on this bond for last year = ((1 + Nominal rate of interest ) ÷ (1 + Inflation rate of return)) - 1

= ((1 + 0.0601) ÷ (1 + 0.03)) - 1

= 1.0601 ÷ 1.03 - 1

= 1.023 - 1

= 0.023

or

= 2.3%

Therefore for computing the actual rate of return we simply applied the above formula.