Real Interest Rate Question

[Jacob Lee]

You have signed a contract to loan some money to a local business. You lent them $20,000 a year ago and they paid back (all according to the contract) $21,000 yesterday. During the same period, the inflation rate was 3.25%. What is the real interest rate that you have earned on your loan?

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Real interest rate = Nominal interest rate - Inflation rate

I'm a little confused with this question.

Would the nominal interest rate be => 21,000-20,000/20,000 (times 100) = 5%

Real interest rate = 5% - 3.25% = 1.75%

I'm not sure if this is correct, if someone could check over my solution that would be great! Thanks

 

[Steven G]

I have much to say about 21,000-20,000/20,000 (times 100) = 5%

Since 20,000/20,000 = 1 we have that 20,000/20,000(time 100) = 100 and 21,000 - 100 = 20,900 NOT 5%

If by chance you mean (21,000-20,000)/20,000 (times 100) = 5% then 21,000 - 20,000 = 1,000 so (21,000-20,000)/20,000 = 1,000/20,000 = 1/20. Now (21,000-20,000)/20,000 (times 100) = 1/20(times 100)( why not (1/20)*100??) = 5. Now where did the percent sign come by? What is your justification of multiplying by 100??

If I were to do this problem I would find out 1st how much the $21,000 is worth today then last year. Then I would try to solve the problem. See if you can do the step that I just calculated and if you can go further. Be careful with your notations, please. Post back showing your work.