A bond that pays interest annually yields a rate of return of 7.50 percent. The inflation rate for the same period is 2 percent. What is the real rate of return on this bond?

5.39%

Explanation:

Given that,

Bond that pays interest annually yields a rate of return = 7.50 percent

Inflation rate for the same period = 2 percent

Real rate = [ (1 + nominal rate) : (1 + inflation rate) ] - 1

Real rate = [ (1 + 0.0750) : (1 + 0.02) ] - 1

= (1.075 : 1.02) - 1

= 1.0539 - 1

= 0.0539 or 5.39%

Therefore, the real rate of return on this bond is 5.39%.