Assume the expected inflation rate to be 4 percent. If the current real rate of interest is 6 percent...?

Question

what might the nominal rate of interest be? How did you figure that? Once again this is for a finance class and I'm really struggling...I want the answer sure, but I also want to understand how the answer is achieved. Please, help!!! Or can you recommend a good website or something that will help with finance courses?

Answer 1

10% is the answer.
The formula is nominal intrest - inflation= real rate of interest.
The formula in your question is real rate of interest + inflation =nominal rate.

The idea in the question is inflation plays a major role in looking at advertised rates of interest. For instance the inflation rate is 5% and most bonds are like 4.3% (the nominal rate). Obviously you would lose -.07% (the real rate of return) in worth because of inflation.

To help you with key terms, I sugest www.investopedia.com.

Answer 2

suppose u hv made an investment of $100 at the beginning of the yr.
now there r 3 rates we are dealing with.
inflation, nominal roi & real or effective rate of interest.
ALWAYS REMEMBER
nominal rate is the rate by wich ur investmnt increases
inflation pulles the actual return down in real terms
real return is the resulting net return 4m the inter play of these factors

Let the nominal roi be 'x' p.a.,
then investment u make should become $ 100+x
but since inflation exists it will pull down the return
return now will be 100+x - (4% of 100+x)
= 96% of 100+x (final figure of return on investment)
now real rate of interest is 6%, so return must be 106 on original investment.
so we get an equation lik 96% of 100+x =106
solving we get 10.5% (approx.) as our answer.

Answer 3

not one of the above. you will desire to incorporate taxes. as a conventional rule: pastime = inflation + taxes After taxes you will have 4% extra funds yet can't purchase any further products.