Question

Assume the nominal rate of return is 8.47% and the real rate is 1.18%. Find the inflation rate of return using the exact formula.

Answer 1

Answer: 7.2%

Explanation:

The Real rate of return is the Nominal rate of return after it is adjusted for inflationary effects.

The formula formula for the Real rate is:

(1 + Real rate) = (1 + Nominal rate) / (1 + inflation rate)

(1 + 1.18%) = (1 + 8.47%) / ( 1 + inflation)

1.0118 = 1.0847 / ( 1 + inflation)

( 1 + inflation) * 1.0118 = 1.0847

( 1 + inflation) = 1.0847 / 1.0118

Inflation = 1.072 - 1

= 7.2%