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Becka borrowed $420 from her cousin at the rate of 8% per year. If the inflation rate was 2.5% that year, what is her cousin's actual rate of return on the loan?

Respuesta :

danishmujtabaqureshi

Answer:

5.37%

Explanation:

Real rate of return = [tex]\frac{1 + NominalRate}{1 + InflationRate} -1[/tex]

= [tex]\frac{1+0.08}{1+0.025} - 1[/tex]

= 0.053658 or 5.37%

The cousin loaned $420 to Becka

she would expect Becka to pay back 420 x (1 + 5.37%) which is equal to $442.554

The real return on the loan = [tex]\frac{442.55-420}{420}[/tex] × 100 = 5.37%

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