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Ch.1 · Comparing Financial Products · easy

If inflation is running at 6% per annum and a bank FD offers 7% per annum, what is the approximate real rate of return?

0% of students got this wrong

EXPLANATION

Real rate of return ≈ Nominal return − Inflation = 7% − 6% = 1%. This means the investor's purchasing power is growing by only 1% per year, not 7%. After tax (at slab rate), the real return could easily turn negative.

A.1% [✓ Correct]

B.13%

C.7%

D.-1%

EXPLANATION

Real rate of return ≈ Nominal return − Inflation = 7% − 6% = 1%. This means the investor's purchasing power is growing by only 1% per year, not 7%. After tax (at slab rate), the real return could easily turn negative.

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