Question

Annuities are a series of constant cash flows that have been received over a certain period of time. However, not all annuities are created equal. Some annuities adjust the payments based on certain macroeconomic factors. Growing annuities are a series of payments that grow at aconstant rate. You invested in an aggressive growth fund and expect to earn 14.84% annually over the next five years. However, due to strong growth, inflation is expected to be 7.35%. What should be your expected real rate of return

Answer 1

Real interest rate= 0.0749= 7.49%

Step-by-step explanation:

Giving the following information:

You invested in an aggressive growth fund and expect to earn 14.84% annually over the next five years. However, due to strong growth, inflation is expected to be 7.35%.

The inflation rate provokes the opposite effect than the interest rate. It decreases the value of money through time, reducing the purchasing price of the nominal value of money.

Real interest rate= nominal interest rate - inflation rate

Real interest rate= 0.1484 - 0.0735

Real interest rate= 0.0749= 7.49%