Question

The nominal interest rate is 10% and inflation is expected to be 5%, what is the real rate of interest? (No need to do a timeline for this one, just show the equation and your answer)

Answer 1

Answer:

0.04761 or 4.76%

Explanation:

The computation is shown below:

Data given in the question

Nominal interest rate = 10%

Expected inflation rate = 5%

So by considering the above information, the real rate of interest is

Real rate of return = {( 1 + nominal rate of return) ÷ ( 1+ inflation rate)} - 1

= {( 1 + 0.10) ÷ ( 1 + 0.05)} - 1

= 0.04761 or 4.76%