Assume the inflation rate 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? The annual rate for the nominal return of 0.75% per month is:___.

6.79%

Explanation:

Use the following formula to calculate the Effective annual rate

Effective annual rate = ( ( (  1 + Nominal return )^12 ) / ( (  1 + Inflation return )^12 ) - 1 )

Where

Nominal rate = 0.75%

Inflation rate = 0.20%

Placing values in the formula

Effective annual rate = ( ( (  1 + 0.75% )^12 ) / ( (  1 + 0.2% )^12 ) - 1 )

Effective annual rate = 6.79%

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