Question

A bond that pays interest annually yields a rate of return of 9.00 percent. The inflation rate for the same period is 2 percent. What is the real rate of return on this bond?

Answer 1

Answer:

6%

Explanation:

We can find the answer using the real rate of return formula:

Real Rate of Return = [(1 + Nominal Rate) / (1 + Inflation Rate)]-1

Now, we simply plug the amounts into the formula:

Real Rate of Return = [(1 + 0.09) / (1 + 0.02)]-1

                                = 0.06

Thus, the real rate of return is 6%