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
Related questions
Question
The real rate of interest is the:
a.rate assuming no inflation
b.observed rate of interest
c.market rate of interest
d.None of the above.
Expert Solution
Step 1
The real rate of interest is the rate of return on an investment after adjusting for inflation. It represents the increase in purchasing power that an investor can expect to receive from an investment. The nominal rate of interest, on the other hand, is the observed rate of interest that does not take inflation into account. The difference between the nominal rate of interest and the inflation rate is known as the inflation premium.
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