NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Investment Landscape
If the nominal return on a fixed deposit is 8% per annum and inflation is 5% per annum, the approximate real return, using the exact relationship, is closest to which of the following?
The real return is about 2.86 percent. Using the exact relationship, divide 1.08 by 1.05 and subtract one, giving 2.857%. Simple subtraction gives 3%, which is only an approximation, and adding the rates is conceptually wrong.
- A3.00%
- B2.86%Correct
- C13.00%
- D3.20%
Explanation
Real return = (1.08/1.05) - 1 = 0.02857, about 2.86%. The simple subtraction 8 - 5 = 3% is only an approximation, so it is not the exact figure. Adding gives 13%, a sign error.
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