A bond has a yield to maturity of 8.79 percent. If the inflation rate is 1.2 percent, what is the real rate of return on the bond?a. 8.86%.b. 15.90%.c. 15.04%.d. 8.22%.e. 9.19%.

Real rate =7.5%

Explanation:

Inflation is the increase in the price level.It erodes the value of money.

Nominal interest is that quoted for investment or loan transactions. It has not been been adjusted for inflation.  

Real interest rate is the amount of interest in terms of the the quantity of good and services that can be purchased. It is the nominal interest rate adjusted for inflation.  

The relationship between inflation, real interest and nominal interest rate is given using the Fishers Effect;  

R = (1+N)/(1+F) - 1

N- Nominal interest rate

R- Real interest rate

F- Inflation rate  

DATA

N- 8.79%

F-1.2%

Real rate = (1.0879/1.012) - 1 )× 100 = 7.5%

Real rate =7.5%

i'ts proportional. if the inflation rate is 12% for example, the cpi will be 12% less.

hope it ,

bioteacher101

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