A bond that pays interest annually yields a rate of return of 6.00 percent. The inflation rate for the same period is 2 percent. What is the real rate of return on this bond? Solution Real rate of return = ((1+ Nominal rate or mormal rate)/(1+Inflation rate))-1 = ((1+0.06)/(1+0.02))-1 =(1.06/1.02)-1 = 1.04-1 =0.04 Real rate of return on this bond is 4%..

1. A bond that pays interest annually yields a rate of return of 6.00 percent. The inflation rate for
the same period is 2 percent. What is the real rate of return on this bond?
Solution
Real rate of return = ((1+ Nominal rate or mormal rate)/(1+Inflation rate))-1
= ((1+0.06)/(1+0.02))-1
=(1.06/1.02)-1
= 1.04-1
=0.04
Real rate of return on this bond is 4%.