Question

A Roth IRA is advertised to pay 1.5% annual interest. You researched the rate of inflation to be 1.15% this year. What is the actual or real rate of return on the IRA?

Answer 1

Answer: 0.35%

Explanation:

Answer 2

Answer: 0.35%

Explanation:

Given the following :

Advertised interest rate = nominal rate = 1.5%

Inflation rate = 1.15%

The real rate of return is calculated by:

[(1 + nominal rate) / ( 1 + inflation rate)] - 1

[(1 + (1.5/100)) / (1 + (1.15/100))] - 1

[(1 + 0.015) / ( 1 + 0.0115)] - 1

[ 1.015 / 1.0115] - 1

1.0034602 - 1 = 0.0034602

Real rate of return = (0.0034602 * 100)%

Real rate of return = 0.346%