A consol with yearly interest of $100 is selling for $1000, the rate of inflation is expected to be 2% and you have the opportunity to instead invest in a stock

Economics Nov 04, 2020

A consol with yearly interest of $100 is selling for $1000, the rate of inflation is expected to be 2% and you have the opportunity to instead invest in a stock. What would the expected real rate return of return have to be on the stock for you to buy and hold the stock?

Expert Solution

Nominal rate = Yearly interest / Selling price = $100 / $1000 = 0.1 = 10%

Real rate = Nominal rate - Inflation rate

= 10% - 2%

= 8%

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