One year ago, you bought a bond for $10,000. You received interest of $400 at the end of the year, as well as your $10,000 principal. If the inflation rate over the last year was 5 percent, calculate your real return. Show your work.
What will be an ideal response?
You received F = $10,400 in nominal terms. Deflating to put this in real terms gives f = F/(1 + ?) = $10,400/1.05 = $9,905. The real return is f / P? 1 = 9,905/10,000 ? 1 = ?0.0095 = ?0.95%.
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