Question

In Kenya the interest rate on a 1 – year loan is 15% and inflation is expected to be 7%.     The expected inflation rate in India is 9%. What should be the interest rate of a 1-year     loan in India.

Answer 1

In Kenya, Interest Rate on 1 Yr Loan Is 15%
Inflation is expected to be 7%,
In India, Inflation is expected to be 7%,
Interest Rate (R) ........?

Interest rate of a 1-year loan in India :
Lets Assume Amount Of Loan Is $100,
($100 + 15 % of $100) *1.07 = ($100 + R % of $100) *1.09
$123.05 = ($100 + R % of $100) *1.09
$123.05/1.09 = ($100 + R % of $100)
$112.89 = $100 + R % of $100
R % of $100 = $112.89 - $100
R % of $100 = $12.89
R = $12.89 / $100 *100
R = 12.89 %