Question

• Using the data below, calculate the real interest rate for each row. Remember that i*_t = [{(1 + i_t) / (1 + I_t)} - 1] x 100, where i* = real pre-tax interest rate, i = nominal interest rate, I = annual inflation/growth rate. Show your work for partial credit. 21 points

Growth Rate	Average Interest Rate	Real Interest Rate
2.60%	7.50%
4.00%	8.30%
2.40%	6.45%
6.50%	5.60%
12.00%	3.25%
0.65%	4.25%
5.40%	4.50%

Answer 1

Using Fischer Equation

(1+r) = (1+n)/ ( 1+i)

Where r = Real interest rate

n = Nominal / Average Interest rate

i = Annual Inflation / Growth rate

a). r= (1+.075)/(1+.026) -1

r = (1.075-1.026)/1.026

r= 0.049/1.026

r= .0478

r = 4.78%

b). r= (1+.083)/(1+0.04) -1

r= ( 1.083-1.04)/1.04

r = 0.043/1.04

r= 0.041346

r= 4.1346%

c) r= (1+0.0645)/(1+0.024) -1

r = (1.0645 -1.024)/1.024

r= 3.95%

d) r= (1+0.056)/( 1+0.065) - 1

r= (1.056-1.065)/1.065

r= -0.845%

e) r = ( 1.0325-1.12)/1.12

r= -7.8125%

f) r= (1.0425-1.0065)/1.0065

r= 3.577%

g) r= ( 1.045-1.054)/1.054

r= -0.8539%