Question

Assume the real rate of return is 3.37% and the inflation rate is 1.47%. Find the nominal rate of return using the exact formula.

Answer 1

4.89%

Step-by-step explanation:

Real rate of return = 3.37%

Inflation rate = 1.47%

The nominal rate of return is computed as shown below:

= [ (1 + real rate of return) x (1 + inflation rate) ] - 1

= [ (1 + 0.0337) x (1 + 0.0147) ] - 1

= (1.0337 * 1.0147) - 1

= 1.04889539 - 1

= 0.04889539

= 4.889539%

= 4.89% approx.