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

Question

Quizplus · Accepted Answer

The real rate of return can be calculated by subtracting the inflation rate from the nominal rate. So, the real rate of return in this case would be 20% - 10% = 10%. However, we have to remember to adjust for compounding, which is why we use the following formula:

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
Real Rate of Return = 1.10 ÷ 1.10 - 1
Real Rate of Return = 0.0909 or 9.09%

Therefore, the accurate real rate of return on these securities is 9.09%, so the best choice is C.

If Inflation Is Anticipated to Be 10 Percent During the Next