If inflation is anticipated to be 10 percent during the next year while a nominal rate of 20 percent will be earned on government bonds, then what is the accurate real rate of return on these securities?

Question

Quizplus · Accepted Answer

The formula for calculating the real rate of return is:

Real rate of return = (1 + nominal rate)/(1 + inflation rate) - 1

Plugging in the given values, we get:

Real rate of return = (1 + 0.20)/(1 + 0.10) - 1
= 1.22/1.1 - 1 
= 0.109 or 10.9%

Therefore, the accurate real rate of return is 9.09%, which is closest to option C) 9.09%.

If Inflation Is Anticipated to Be 10 Percent During the Next