contestada

if you are promised a nominal return of 12% on a 1-year investment, and you expect the rate of inflation to be 3%, what real rate do you expect to earn?

Respuesta :

The real rate I expect to earn is 8.74%.

Nominal interest rate is the interest earned on an investment. It is the sum of real interest rate and inflation.

Real interest rate is the interest rate that has been adjusted for inflation. It is nominal interest rate less inflation.

Inflation is the persistent rise in general price levels.

In order to determine the real interest rate, use this formula:

[tex]1 + real interest rate = \frac{1 + nominal interest rate }{1 + inflation rate}[/tex]

1 + real interest rate = [tex]\frac{1.12}{1.03}[/tex]

1 + real interest rate = 1.0874

Real interest rate = 1.0874 - 1

Real interest rate = 0.0874

Real interest rate = 8.74%

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