Question

If the total return from an investment is 9% and the inflation rate is 3%, the real return (interest rate) is group of answer choices 4% 6% 5.8% 6.7%

a) 4%
b) 6%
c) 5.8%
d) 6.7%

Answer 1

To find the real interest rate, you subtract the inflation rate from the total return of the investment. With a 9% total return and a 3% inflation rate, the real interest rate is 6%.

Step-by-step explanation:

To calculate the real return from an investment, you subtract the inflation rate from the total (nominal) return of the investment. This is because the nominal return includes both the real gain and the inflation gain. For example, if the nominal interest rate is 7% and the rate of inflation is 3%, then the real interest rate is calculated as 7% - 3%, which gives us a real interest rate of 4%.

In the given problem, the total return from an investment is 9% and the inflation rate is 3%. Using the same formula for calculating the real return, we have:

Real Return = Nominal Interest Rate (Total Return) - Inflation Rate

Real Return = 9% - 3%

Real Return = 6%

Therefore, the real interest rate in this case is 6%.