Question

Becka borrowed $420 from her cousin at the rate of 8% per year. If the inflation rate was 2.5% that year, what is her cousin's actual rate of return on the loan?

Answer 1

Answer:

5.37%

Explanation:

Real rate of return = $\frac{1 + NominalRate}{1 + InflationRate} -1$

= $\frac{1+0.08}{1+0.025} - 1$

= 0.053658 or 5.37%

The cousin loaned $420 to Becka

she would expect Becka to pay back 420 x (1 + 5.37%) which is equal to $442.554

The real return on the loan = $\frac{442.55-420}{420}$ × 100 = 5.37%