14. You are considering an investment that has a nominal annual interest rate of

Question

14.

You are considering an investment that has a nominal annual interest rate of 11.73 percent, compounded semiannually. Therefore, the effective annual rate, or EAR (annual percentage yield) is _____.

Round the answer to two decimal places in percentage form

15.

Assume that the inflation rate during the last year was 1.49 percent. US government T-bills had the nominal rates of return of 3.40 percent. What is the real rate of return for a T-bill?

Round the answer to two decimal places in percentage form

16.

Large-cap stocks had the nominal rates of return of 10.59 percent. The rate of inflation during the last year was 1.13 percent. What is the real rate of return for large-cap stocks?

Round the answer to two decimal places in percentage form

Explanation / Answer

Answer for subpoint 14:u

Given annual interest rate =11.73% Interest is paid semi annually.

Let 1 be the principal amount.

Formula for calculation of annual yield is as follows:

n=2 as the interest is paid semianually.

Annual yield=P(1+R/n)n-1

= 1(1+.1173/2)2 -1

=1.120739 - 1 =0.120739 *100 = 12.074%

Answer for subpoint 15:

Given inflation rate during the year =1.49%

nominal rate of interest =3.4%

Formula for computation of real rate of interest = nominal rate of interest - inflation rate =3.4% -1.49% = 1.91%

Answer for subpoint 16:

Nominal interest rate =10.59%

Inflation rate= 1.13%

Real rate of return = Nominal rate - inflation rate = 10.59% -1.13% = 9.46%

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