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emmasim [6.3K]
3 years ago
8

A bond that pays interest annually yields a rate of return of 7.50 percent. The inflation rate for the same period is 2 percent.

What is the real rate of return on this bond?
Business
1 answer:
Jlenok [28]3 years ago
7 0

Answer:

5.39%

Explanation:

Given that,

Bond that pays interest annually yields a rate of return = 7.50 percent

Inflation rate for the same period = 2 percent

Real rate = [(1 + nominal rate) ÷ (1 + inflation rate)] - 1

Real rate = [(1 + 0.0750) ÷ (1 + 0.02)] - 1

               = (1.075 ÷ 1.02) - 1

               = 1.0539 - 1

               = 0.0539 or 5.39%

Therefore, the real rate of return on this bond is 5.39%.

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