Question

The inflation rate over the past year was 3.8 percent. If an investment had a real return of 6.9 percent, what was the nominal return on the investment?

Answer 1

Answer:

Nominal rate of return= 10.96%

Explanation:

Inflation is the increase in the price level.It erodes the value of money.rise in the price of money

Nominal interest is that quoted for investment or loan transactions. It has not been been adjusted for inflation.  

Real interest rate is the amount of interest in terms of the the quantity of good and services that can be purchased. It is the nominal interest rate adjusted for inflation.

The relationship between inflation, real interest and nominal interest rate is given using the Fishers Effect;

N = ( (1+R) × (1+F)) - 1

N- nominal rate, R-real rate, F- inflation

Nominal rate of return =(1.038)× (1.069) - 1 = 0.109622

Nominal rate of return =  0.109622 × 100 = 10.96%

Nominal rate of return= 10.96%