Answer:
Real interest rate= -0.0048= -0.48%
Explanation:
Giving the following information:
The two-year interest rate is 13.8% and the expected annual inflation rate is 6.9%
First, we need to calculate the biannual inflation rate:
Biannual inflation rate= (1+r)^2 - 1
Biannual inflation rate= (1.069^2) - 1
Biannual inflation rate= 0.1428
Now, to calculate the real interest rate, we need to deduct from the nominal interest rate the effect of inflation:
Real interest rate= 0.138 - 0.1428
Real interest rate= -0.0048
The real interest rate is negative. It means that the purchasing power of an investment decrease due to the negative effect of inflation.
