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14 July, 01:34

Monique lends Taylor $1,200 on March 15, 2009. Taylor is expected to return $1,260 on March 14, 2010. Monique expects inflation over the one-year period to be 2%. What is the real interest rate that Monique desires

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Answers (2)
  1. 14 July, 01:43
    0
    2.94%

    Explanation:

    Real Rate of Return is the actual rate of return that an investor gets from investment excluding any inflation effect.

    Present Value = PV = $1,200

    Future Value = FV = $1,260

    Numbers of period = n = 1 year

    Use Following Formula to calculate the nominal Interest rate

    FV = PV x (1 + r) ^n

    $1,260 = $1,200 x (1 + r)

    $1,260 / $1,200 = 1+r

    1.05 = 1 + r

    r = 1.05 - 1 = 0.05 = 5%

    As the 5% is the Nominal Interest rate

    we Will Use the Fisher Effect formula to calculate the real Interest rate

    1 + Nominal Interest Rate = (1 + Real Interest Rate) x (1 + Inflation Rate)

    1 + 5% = (1 + Real Interest Rate) x (1 + 2%)

    1 + 0.05 = (1 + Real Interest Rate) x (1 + 0.02)

    1.05 = (1 + Real Interest Rate) x 1.02

    1 + Real Interest Rate = 1.05 / 1.02

    1 + Real Interest Rate = 1.0294

    Real Interest Rate = 1.0294 - 1

    Real Interest Rate = 0.0294 = 2.94%
  2. 14 July, 01:54
    0
    Real rate of interest = 2.9%

    Explanation:

    The fishers' equation expresses the relationship between nominal interest rate, real interest rate and the inflation rate

    The nominal rate of interest

    = (1260/1200 - 1) * 100

    = 5%

    The fisher's equation is given as

    (I+N) = (1+R) (1+F)

    N - Nominal rate of interest

    R - Real rate of interest

    F - Inflation rate

    Real rate of Interest

    = (1+N) / (1+F) - 1

    = 1.05 / (1.02) - 1

    =2.9%
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