Discuss CSI IFC Exam Topic 4 Question 2

For the last year, an investor earned a return before adjustment for inflation of 2% on a money market fund, while inflation averaged 1.5%. What was his nominal rate of return?

A0.50%

B1.50%

C3.50%

D2.00%

Suggested Answer: D

The nominal rate of return is the return before adjustment for inflation, which is given as 2%. The real rate of return would be adjusted for inflation (2% - 1.5% = 0.5%), but the question asks for the nominal rate. The feedback from the document states:

'It is important to consider the effects of inflation on investments because we can isolate the difference between nominal and real returns. Investors are more concerned with the real rate of return -- the return adjusted for the effects of inflation. A nominal return is a return that has not been adjusted for the impact of inflation. The approximate real rate of return is calculated as: Real Return = Nominal Rate - Annual Inflation Rate.'

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26 comments · newest first

Dominga 3 months ago

No, nominal is before inflation, so it's definitely 2.00%.

Pa 3 months ago

But isn't it 0.50% after inflation?

Marsha 3 months ago

I agree, it seems straightforward.

Alisha 4 months ago

I think the nominal rate is 2.00%.

Evan 5 months ago

I thought it would be higher than that!

Ruthann 5 months ago

So, does inflation really only affect the real return?

Tish 5 months ago

Wait, is it really that simple?

Alaine 6 months ago

Totally agree, it's just the stated return.

Theodora 6 months ago

The nominal rate of return is 2%.

Tiffiny 6 months ago

This is a piece of cake. The nominal rate of return is just the return before inflation, so the answer is D) 2.00%. No need to overthink it.

Willetta 6 months ago

C) 3.50% is the way to go. Gotta factor in that sweet, sweet 2% return plus the 1.5% inflation. Easy money!

Yvonne 6 months ago

Haha, I bet the person who wrote this question was trying to trick us. But I'm not falling for it - the answer is obviously D) 2.00%.

Darci 6 months ago

D) 2.00% is the correct answer. The question states the return before inflation was 2%, so that's the nominal rate.

Hubert 7 months ago

The answer is clearly B) 1.50%. Inflation was 1.5%, so the nominal rate of return must be that.

Micaela 7 months ago

I feel confused about this one. I thought nominal rates were just the stated rates, but I keep second-guessing myself. Could it really be 1.50%?

Christiane 7 months ago

I practiced a similar question where we had to adjust for inflation. If the return is 2% and inflation is 1.5%, I guess the nominal rate is still 2.00%.

Dahlia 8 months ago

I'm not entirely sure, but I remember something about nominal rates being different from real rates. Is it possible that the answer is 0.50%?

Oneida 8 months ago

I think the nominal rate of return is just the return before inflation, so it should be 2.00%.

Ora 8 months ago

I'm pretty confident the answer is D) 2.00%. The question states the investor earned a 2% return before adjusting for inflation, so that's the nominal rate of return.

Elli 8 months ago

I'm a bit confused. Isn't the nominal rate of return the sum of the real rate of return and the inflation rate? If so, then the answer should be B) 1.50%.

Macy 8 months ago

Okay, I think I got it. The nominal rate of return is the return before adjusting for inflation, which is 2%. So the answer must be D) 2.00%.

Willodean 9 months ago

Wait, I'm not sure if that's the right approach. Isn't the nominal rate of return the actual rate of return before adjusting for inflation?

Cory 9 months ago

Hmm, this seems straightforward. I just need to add the return and inflation rate together to get the nominal rate of return.

Mignon 2 months ago

↳ replying to Cory

I agree with Sheron. It's the return before inflation.

Sheron 3 months ago

↳ replying to Cory

No, it's actually 2.00%.

Maurine 3 months ago

↳ replying to Cory

I think it's 3.50%. Just add them up!

CSI IFC Exam - Topic 4 Question 2 Discussion