An investor earns a nominal return of 7.5% per annum on a fixed deposit during a financial year when consumer price inflation averages 5.5% per annum. What is the approximate real rate of return realized by the investor?

[ A ]13.0% per annum

[ B ]2.0% per annum[ CORRECT ]

[ C ]7.5% per annum

[ D ]1.36% per annum

Takeaway

Option B is correct: 2.0% per annum

Derivation

The real rate of return represents the growth of purchasing power after stripping out inflation. Approximately, Real Rate = Nominal Rate - Inflation Rate = 7.5% - 5.5% = 2.0% per annum. This concept evaluates an investor's ability to assess whether investment returns genuinely increase wealth in real terms. A common mistake among candidates is adding inflation to the nominal return or assuming the unadjusted nominal rate reflects actual real economic gains.

Why the others fail

A — 13.0% per annum

13.0% per annum incorrectly sums the nominal interest rate and inflation rate rather than subtracting inflation.

C — 7.5% per annum

7.5% per annum confuses the unadjusted nominal rate with the real purchasing power return after inflation.

D — 1.36% per annum

1.36% per annum incorrectly divides nominal return by inflation rather than applying the standard subtraction formula.