Answer:
2.94%
Explanation:
Real Rate of Return is the actual rate of return that an investor gets from investment excluding any inflation effect.
Present Value = PV = $1,200
Future Value = FV = $1,260
Numbers of period = n = 1 year
Use Following Formula to calculate the nominal Interest rate
FV = PV x ( 1 + r )^n
$1,260 = $1,200 x ( 1 + r )
$1,260 / $1,200 = 1+r
1.05 = 1 + r
r = 1.05 - 1 = 0.05 = 5%
As the 5% is the Nominal Interest rate
we Will Use the Fisher Effect formula to calculate the real Interest rate
1 + Nominal Interest Rate = ( 1 + Real Interest Rate ) x ( 1 + Inflation Rate )
1 + 5% = ( 1 + Real Interest Rate ) x ( 1 + 2% )
1 + 0.05 = ( 1 + Real Interest Rate ) x ( 1 + 0.02 )
1.05 = ( 1 + Real Interest Rate ) x 1.02
1 + Real Interest Rate = 1.05 / 1.02
1 + Real Interest Rate = 1.0294
Real Interest Rate = 1.0294 - 1
Real Interest Rate = 0.0294 = 2.94%
