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Shkiper50 [21]
3 years ago
7

Suppose you purchase a $5,000 bond that pays 7% interest annually and matures in five years. If the inflation rate during the ne

xt five years is 4%, the estimated real rate of return is
Business
1 answer:
galina1969 [7]3 years ago
8 0

Answer:

2.88%

Explanation:

Use the following formula to calculate the real rate of return

Real rate of return = \frac{( 1 + Nominal interest rate )}{( 1 + inflation rate)} -1

Where

Nominal Interest rate = 7% = 0.07

Inflation rate = 4% = 0.04

Placing values in the formula

Real rate of return = \frac{( 1 + 0.07 )}{( 1 + 0.04)} -1

Real rate of return = \frac{1.07}{1.04} -1

Real rate of return = 1.0288 - 1

Real rate of return = 0.0288

Real rate of return = 2.88%

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