Answer: Real Rate of return = 0.498% = 0.5%
Explanation:
Real rate of return = {(1 + nominal rate) / (1 + inflation rate)} - 1
In the questions
nominal interest rate = 1% (0.01)
Inflation rate = 0.5% (0.005)
Real Rate of return = {(1 + 0.01) / (1 + 0.005)} - 1
Real Rate of return = (1.01 / 1 .005) - 1
Real Rate of return = 1.004975 - 1
Real Rate of return = 0.004975
Real Rate of return = 0.498% = 0.5%
