1) What is the real (inflation-free) before-tax rate of return (to two decimals)

Question

1) What is the real (inflation-free) before-tax rate of return (to two decimals) on Mary

Mary bought a five-year $20,000 Guaranteed Income Certificate (GIC) on January 1, 2007 (for which she paid $20,000). Mary will receive $1,000 in interest income on December 31 from 2007 to 2011. On December 31, 2011 (the GIC's maturity date), Mary will receive, in addition to her last interest payment of $1,000, the $20,000 that she invested on January 1, 2007. During this period, inflation is expected to be 2 percent per year.

Explanation / Answer

1.  real (inflation-free) before-tax rate of return (to two decimals) on Mary

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