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

Answer:

d. 6.31%

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%