Question

A corporate bond that pays interest rates annualy yields a rate of return of 9.50%. the inflation rate for the same period is 3%. What is the real rate of return on this bond?a. 1.06%.

b. 12.50%.
c. 3.00%.
d. 6.31%.
e. 3.17%.

Answer 1

d. 6.31%

Step-by-step explanation:

The relationship between the nominal interest rate(9.50%),inflation rate( 3%) and the real rate of return is shown by the formula below:

(1+nominal rate of return)=(1+inflation rate)*(1+real rate of return)

nominal rate of return=9.50%

inflation rate=3%

real rate of return is the unknown

(1+9.50%)=(1+3%)*(1+real rate of return)

1.095=1.03*(1+real rate of return)

1.095/1.03=1+real rate of return

real rate of return=(1.095/1.03)-1

real rate of return=6.31%