An investment gives you an 6.45% nominal return over 1 year. There was 1.75% inflation over...
An investment gives you an 6.45% nominal return over 1 year. There was 1.75% inflation over that year. According to the Fisher Equation what was your real return?
Homework Answers
As per Fisher equation :
Nominal interest rate = Real interest rate +Inflation rate
6.45 = Real rate +1.75
Real rate = 6.45 - 1.75
= 4.7%
This method provides an approximate result .
Note:
To find exact result :
(1+nominal rate )= (1+real rate)(1+inflation rate)
(1+.0645) =(1+real rate)(1+.0175)
(1+real rate) = 1.0645 /1.0175
real rate= 1.0462-1
= .0462 or 4.62%
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