Question

Last year, you earned a nominal rate of return of 6.92 percent on your bond investments. During that time, the inflation rate was 2.74 percent. How much did your purchasing power increase (real rate)

Answer 1

Real rate of return= 0.0418 = 4.18%

Step-by-step explanation:

Giving the following information:

Nominal rate of return= 6.92%

Inflation rate= 2.74%

The inflation rate decreases the purchasing power of nominal money.

To calculate the real rate of return, we need to use the following formula:

Real rate of return= nominal rare of return - inflation rate

Real rate of return= 0.0692 - 0.0274

Real rate of return= 0.0418 = 4.18%