A bond that pays interest annually yielded 7.25 percent last year. The inflation rate for the same period was 5.50 percent. What was the actual real rate of return on this bond for last year?

Actual real rate of return = 1.658768 (Approx)

Explanation:

Given:

Nominal rate of return = 7.25% = 7.25 / 100 = 0.0725

Inflation rate = 5.50% = 5.50 / 100 = 0.055

Actual real rate of return = ?

Computation of actual real rate of return:

Actual real rate of return = [ (1+Nominal rate of return) / (1+Inflation rate) ] - 1

Actual real rate of return = [ (1+0.0725) / (1+0.055) ] - 1

Actual real rate of return = [ (1.0725) / (1.055) ] - 1

Actual real rate of return = [1.01658768] - 1

Actual real rate of return = 0.01658768

Actual real rate of return = 1.658768 (Approx)