Becka borrowed $100 from her cousin at the rate of 6% per year. If the inflation rate was 2% that year, what is her cousin's actual rate of return on the loan?
How do you work this out?
The actual rate of return on the loan can be calculated by subtracting the inflation rate from the interest rate. In this case, the actual rate of return is 4% (6% - 2%).
To find the cousin's actual rate of return on the loan, you need to consider both the nominal interest rate (6%) and the inflation rate (2%). The actual rate of return accounts for the purchasing power of the money borrowed.
To work it out, you can follow these steps:
1. Start by calculating the inflation-adjusted interest rate. Subtract the inflation rate from the nominal interest rate:
Actual Rate of Return = Nominal Interest Rate - Inflation Rate
Actual Rate of Return = 6% - 2% = 4%
2. Now that you have the actual rate of return, you can consider it as the real interest rate. This means that the cousin's investment would have to earn a 4% return in order to maintain its purchasing power after accounting for inflation.
Hence, the cousin's actual rate of return on the loan is 4%.
To calculate the cousin's actual rate of return on the loan, we need to consider the inflation rate. The formula to calculate the actual rate of return is as follows:
Actual Rate of Return = Nominal Rate - Inflation Rate
In this case, the nominal rate is the loan rate of 6%, and the inflation rate is 2%.
Actual Rate of Return = 6% - 2%
= 4%
Therefore, the cousin's actual rate of return on the loan is 4%.