To find the nominal rate of return using the exact formula, you can use the Fisher equation, which relates the nominal rate of return (i), the real rate of return (r), and the inflation rate (π):
\[ (1 + i) = (1 + r)(1 + \pi) \]
Given:
- Real rate of return (r) = 4.00% = 0.04
- Inflation rate (π) = 3.00% = 0.03
Plugging in the values:
\[ (1 + i) = (1 + 0.04)(1 + 0.03) \] \[ (1 + i) = (1.04)(1.03) \] \[ (1 + i) = 1.0712 \]
Now, to find the nominal rate (i):
\[ i = 1.0712 - 1 \] \[ i = 0.0712 \]
Converting this to a percentage:
\[ i = 7.12% \]
Thus, the nominal rate of return is 7.12%.
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