Question

A corporate bond that pays interest annually yields a rate of return of 10.00 percent. The inflation rate for the same period is 4 percent. What is the real rate of return on this bond

Answer 1

The real rate of return on this bond is 5.77%

Step-by-step explanation:

1. Let's review the information given to us to answer the question correctly:

Nominal rate = 10% = 0.1

Inflation rate = 4% = 0.04

2. What is the real rate of return on this bond?

Let's recall the formula of the Real Rate of Return:

Real Rate of Return = (1 + Nominal rate/1 + Inflation rate) - 1

Replacing with the values we know, we have:

Real Rate of Return = (1 + 0.1/1 + 0.04) - 1

Real Rate of Return = 1.0577 - 1

Real Rate of Return = 0.0577 or 5.77%

Answer 2

5.76%

Step-by-step explanation:

The solution is as follows,

=> (1 + 0.10) = (1 + r) * (1 + 0.04)

=> r = (1.1 / 1.04) - 1

=> r = 5.76%

Hope this clear things up.

Thankyou.