Question

What is the minimum nominal rate of return that you should accept if you require a 4% real rate of return and the rate of inflation is expected to average 3.5% during the investment period

Answer 1

Answer:

7.5%

Explanation:

real interest rate = nominal interest rate - inflation rate

nominal interest rate = real interest rate + inflation rate = 4% + 3.5% = 7.5%

inflation rate refers to the general increase in the price level while the real rate of return is the rate that investors seek after discounting inflation, i.e. the real gain of taking an investment.