One year ago, you bought a bond for $10,000.00. You received interest of $400.00 at the end of the year, as well as your $10,000.00 principal. If the inflation rate over the last year was five percent, calculate the real return. Show your work.
To calculate the real return, we need to adjust the nominal return for inflation.
The nominal return is the total amount received, which in this case is the principal ($10,000.00) plus the interest ($400.00), for a total of $10,400.00.
The inflation rate is given as five percent, which means that prices increased by five percent over the year.
To adjust for inflation, we need to divide the nominal return by (1 + inflation rate). In this case, we divide $10,400.00 by (1 + 0.05):
Real Return = $10,400.00 / (1 + 0.05)
Simplifying this equation, we have:
Real Return = $10,400.00 / 1.05
Real Return = $9,904.76
So, the real return on the bond, taking inflation into account, is $9,904.76.