Question

Consider the following information for a period of years:

	Arithmetic Mean
Long-term government bonds	7.4	%
Long-term corporate bonds	7.5
Inflation	4.2

a.	What is the real return on long-term government bonds? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
b.	What is the real return on long-term corporate bonds? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

Real return=[(1+arithmetic mean)/(1+inflation rate)]-1

a.Real return=[(1+0.074)/(1+0.042)]-1

=(1.074/1.042)-1

=3.07%(Approx)

b.Real return=[(1+0.075)/(1+0.042)]-1

=(1.075/1.042)-1

=3.17%(Approx)