One year ago, you bought a bond for $40,000.Today, you received the $40,000 principal back plus an interest of $2,000.If the inflation rate over the last year was 3 percent, calculate your real return (Round off your answer to the nearest percentage point).

Question

Quizplus · Accepted Answer

The nominal return is calculated as the interest received divided by the initial investment, which is $2,000 / $40,000 = 5%. To find the real return, adjust the nominal return for inflation using the formula: real return = ((1 + nominal return) / (1 + inflation rate)) - 1. Substituting the given values: real return = ((1 + 0.05) / (1 + 0.03)) - 1 = 1.94%, which rounds off to 2%.

One Year Ago, You Bought a Bond for $40,000