Question

If investors are to earn a 3.3% real interest rate, what nominal interest rate must they earn if the inflation rate is

a. zero
b. 4.3%
c. 6.3%

Answer 1

(1 + NOMINAL RATE) = (1 + REAL RATE) (1 + INFLATION RATE)

CASE (a)

(1+ NOMINAL RATE) = (1 + 0.033)(1+0) = 1.033

NOMINAL RATE = 0.033 = 3.3%

ANSWER : a : NOMINAL RATE = 3.3%

CASE (b)

(1+ NOMINAL RATE) = (1 + 0.033)(1+0.043) = 1.077419

NOMINAL RATE = 0.077419 = 7.74% (ROUNDING TWO 2 DECIMALS)

ANSWER : b : NOMINAL RATE = 7.74% OR = 7.7% (ROUNDING TO SINGLE DECIMAL)

CASE (c)

(1+ NOMINAL RATE) = (1 + 0.033)(1+0.063) = 1.098079

NOMINAL RATE = 0.098079 = 9.81% (ROUNDING TWO 2 DECIMALS)

ANSWER : c : NOMINAL RATE = 9.81% OR = 9.8% (ROUNDING TO SINGLE DECIMAL)

(THUMBS UP PLEASE)

answered by: anonymous