After considering a number of investment opportunities, you have decided that you should be able to earn a real return of 2% on your P100,000 in savings over the coming year. If the expected rate of inflation is expected to be 3.5% over the coming year, what nominal rate of return must you anticipate in order to earn the 2% real rate of return? Nominal rate= (1 + Real rate) + (1 + Inflation rate) - 1 = Real rate + Inflation rate + (Real rate x Inflation rate)
After considering a number of investment opportunities, you have decided that you should be able to earn a real return of 2% on your P100,000 in savings over the coming year. If the expected rate of inflation is expected to be 3.5% over the coming year, what nominal rate of return must you anticipate in order to earn the 2% real rate of return? Nominal rate= (1 + Real rate) + (1 + Inflation rate) - 1 = Real rate + Inflation rate + (Real rate x Inflation rate)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Determinants of Interest Rates
Problem Illustration:
Solving for the Nominal Rate of Interest
After considering a number of investment opportunities,
you have decided that you should be able to earn a real
return of 2% on your P100,000 in savings over the
coming year. If the expected rate of inflation is expected
to be 3.5% over the coming year, what nominal rate of
return must you anticipate in order to earn the 2% real
rate of return?
Nominal rate= (1 + Real rate) + (1+ Inflation rate) - 1
= Real rate + Inflation rate + (Real rate x Inflation rate)
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