You want to make a 4% real return on a loan that you are planning to make, and the expected inflation rate during the period of the loan is 5%. You should charge an interest rate of

Question

Quizplus · Accepted Answer

To achieve a 4% real return with an expected inflation rate of 5%, you use the formula: real interest rate = nominal interest rate - inflation rate. Rearranging to solve for the nominal interest rate gives: nominal interest rate = real interest rate + inflation rate. Plugging in the numbers: nominal interest rate = 4% + 5% = 9%.

You Want to Make a 4% Real Return on a Loan