Assume inflation is 0.2% per month. Would you rather earn a nominal return of 0.

Question

Assume inflation is 0.2% per month. Would you rather earn a nominal return of 0.75% per month, compounded monthly, or a real return of 6.5% APR, compounded annually? (Note: Be careful not to round any intermediate steps less than six decimal places.) The annual rate or the nominal return of 0.75% per month sD The nominal annual rate for the real return of 6.5% APR is . (Type your answer in decimal format. Round to six decimal places.) (Select from the drop-down menus.) Based on a comparison of the two rates and the current inflation rate, you would prefer the Type your answer in decimal format. Round to six decimal places | option over the | option

Explanation / Answer

annual rate for nominal return of 0.75% per month = 0.75% * 12 = 9%

(1+ nominal return ) = (1+ real return) (1+inflation rate)

nominal return for real return of 6.5% APR

= (1+6.5%)(1+2.4%) - 1

= 9.06%

hence choose real return compounded annually. over nominal return compounded monthly

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