The nominal rate of return on the bonds of Stu's Boats is 7

Finance Dec 27, 2020

The nominal rate of return on the bonds of Stu's Boats is 7.75 percent. The real rate of return is 3.6 percent. What is the rate of inflation? O 415 percent 04.01 percent 3.88 percent 0 2.15 percent 5.68 percent 020 MS Edu

Expert Solution

Given the following information,

Nominal rate of return = 7.75% = 0.0775

Real rate of return = 3.6% = 0.036

Rate of inflation = ?

We know that,

1 + nominal rate of return = (1 + real rate of return) * (1 + inflation rate)

Substituting the given values in the above equation, we get

1 + 0.0775 = (1 + 0.036) * (1 + inflation rate)

1.0775 = (1.036) * (1 + inflation rate)

1.0775/1.036 = (1 + inflation rate)

(1 + inflation rate) = 1.0401

inflation rate = 1.0401 - 1

inflation rate = 0.0401 or 4.01%

Therefore, the rate of inflation is 4.01 percent

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