The real rate of return on the bond is 3.06%.
What is inflation?
- In economics, inflation is defined as a general rise in the prices of goods and services in an economy.
- When the general price level rises, each unit of currency purchases fewer goods and services; thus, inflation corresponds to a loss of money's purchasing power.
- Deflation, or a sustained decrease in the general price level of goods and services, is the inverse of inflation.
- The inflation rate, which is the annualized percentage change in a general price index, is the most commonly used measure of inflation.
- Because not all prices rise at the same rate, the consumer price index (CPI) is frequently used for this purpose.
- In the United States, the employment cost index is also used to calculate wages.
The real rate of return on the bond is:
- A bond has a yield to maturity of 5.06%.
- Inflation is 2%.
So,
- Real rate of return = rate of return - inflation
- The real rate of return = 5.06 - 2
- Real rate of return = 3.06%
Therefore, the real rate of return on the bond is 3.06%.
Know more about inflation here:
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