A Roth IRA is advertised to pay 1.5% annual interest. You researched the rate of inflation to be 1.15% this year. What is the actual or real rate of return on the IRA?

Answer: 0.35%

Step-by-step explanation:

Given the following:

Advertised interest rate = nominal rate = 1.5%

Inflation rate = 1.15%

The real rate of return is calculated by:

[ (1 + nominal rate) / (1 + inflation rate) ] - 1

[ (1 + (1.5/100)) / (1 + (1.15/100)) ] - 1

[ (1 + 0.015) / (1 + 0.0115) ] - 1

[ 1.015 / 1.0115] - 1

1.0034602 - 1 = 0.0034602

Real rate of return = (0.0034602 * 100) %

Real rate of return = 0.346%