Asked by Kayley Klein on Jul 08, 2024
Verified
The outstanding bonds of RTF, Inc., provide a real rate of return of 3.3%. The current rate of inflation is 2.85%. What is the nominal rate of return on these bonds?
A) 6.12%
B) 6.15%
C) 6.30%
D) 6.24%
E) 6.27%
Real Rate Of Return
A yearly rate of return on an investment, corrected for inflationary changes or other external conditions affecting the price level.
Nominal Rate
The stated interest rate on a loan or investment, not adjusting for inflation or compounding effect.
Inflation
Inflation refers to the pace at which the average cost of products and services increases, leading to a decrease in buying power.
- Master the techniques of calculating and interpreting the real, nominal, and inflation rates of return.
Verified Answer
MA
Morgan AdkinsJul 12, 2024
Final Answer :
D
Explanation :
The nominal rate of return can be calculated using the Fisher equation, which is (1 + nominal rate) = (1 + real rate) * (1 + inflation rate). Plugging in the given values: (1 + nominal rate) = (1 + 0.033) * (1 + 0.0285) = 1.062455, which gives a nominal rate of approximately 6.24%.
Learning Objectives
- Master the techniques of calculating and interpreting the real, nominal, and inflation rates of return.