Question

If a lender charges a nominal interest rate of 6% and expects inflation to be 3%, they expect to earn a real interest rate of

Answer 1

Answer:

2.91%

Explanation:

The computation of the real interest rate is shown below:

Real interest rate is

= (1 + nominal interest rate) ÷ (1 + inflation rate) - 1

= (1 + 0.06) ÷ (1 + 0.03) - 1

= (1.06 ÷ 1.03) - 1

= 2.91%

Hence, the expected real interest rate earned is 2.91% and the same is to be considered

We simply applied the above formula