The real return on a bond that pays a fixed interest is equal to
A)the nominal interest rate plus the rate of inflation
B)the nominal interest rate divided by the rate of inflation
C)the nominal interest rate minus the rate of inflation
D)the nominal interest rate times the rate of inflation
E)the interest rate that is stated on the bond

Question

Quizplus · Accepted Answer

The real return on a bond is the nominal interest rate minus the rate of inflation. This is because inflation erodes the purchasing power of money over time, thus reducing the real return on the investment. Subtracting the rate of inflation from the nominal interest rate accounts for this effect and gives the real return on the bond.

The Real Return on a Bond That Pays a Fixed