The real rate of return formula exists utilized, and we use the data given in the exercise to the formula to estimate the real rate of return.
The real rate of return exists at 2.926%.
The real rate of return formula exists utilized, and we use the data given in the exercise to the formula to estimate the real rate of return.
The formula for the real rate of return:
R = (1+N)/(1+i) - 1
Where, N exists the nominal rate and i exists the inflation rate, as decimals.
A certificate of deposit offers a nominal interest rate of 5.5 percent annually.
This means that N = 0.055
Inflation exists 2.5 percent
i = 0.025
Substitute the values in the above equation, we get
[tex]$R = [(1+0.055)/(1+0.025)] -1[/tex]
= [1.055/1.025] - 1
= 1.02926 - 1
= 0.02926
0.02926 [tex]*[/tex] 100% = 2.926% ~ 3%
The real rate of return exists at 2.926%.
Therefore, the correct answer is option D. 3%.
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