NASAA Series 65, Uniform Investment Adviser Law ExaminationEconomic Factors and Business InformationEasy
An investment adviser is explaining the concept of real interest rates to a client. If the nominal interest rate on a bond is 5% and the inflation rate is 2%, what is the approximate real interest rate?
- A2.5%
- B5%
- C3%
- D7%
Show answer & explanationAnswer & explanation
Correct answer: C. 3%
The real interest rate is approximately calculated as the nominal interest rate minus the inflation rate. In this case, 5% - 2% = 3%.
Why the other options are wrong
- A. This is a miscalculation, perhaps dividing the nominal rate by inflation.
- B. This is the nominal interest rate, not accounting for inflation.
- D. This represents the sum of the nominal interest rate and the inflation rate, which is not the real interest rate.
Real Interest Rate
The interest rate an investor receives after accounting for inflation.
- Measures the true return on an investment in terms of purchasing power.
- Approximated by: Nominal Interest Rate - Inflation Rate.
- Crucial for evaluating the actual profitability of investments.
Memory trick: Nominal is what you see, Real is what you get after inflation's bite.