Question

the outstanding bonds of Winter Tires Inc. provide a real rate of return of 3.6 percent. If the current rate of inflation is 2.68 percent, what is the actual nominal rate of return on these bonds?

Answer 1

Answer:

Actual nominal rate = 6.38%

Explanation:

Actual nominal rate of return:

(1 + real rate) = (1 + nominal rate) / (1 + inflation rate)

1 + 3.6% = 1 + nominal rate / 1 + 2.68%

1 + 0.036 = 1 + nominal rate / 1 + 0.0268

1.036 = 1 + nominal rate / 1.0268

1 + nominal rate = 1.036 * 1.0268

1 + nominal rate = 1.0637648

nominal rate = 1.0637648 - 1

nominal rate = 0.0637648

nominal rate = 6.37648

nominal rate = 6.38%