Session 07: Objective 6 - Inflation and Interest Rate

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The Finance Coach: Introduction to Corporate Finance with Greg Pierce

Textbook:
Fundamentals of Corporate Finance
Ross, Westerfield, Jordan

Chapter 7: Interest Rates and Bond Valuation

Objective 6 - Key Concepts:
Real Rate (r): Interest rates that are adjusted for inflation
Nominal Rate (R): Total rate of return
Fisher Effect (Exact vs. Approximate)

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Question for you...if the PV is 50, 000 and R is first payment made at time 1. Each payment increases at a rate of 5% annually and inflation is 5% and you expect to pay it off in 20 years, how would you establish R? Would it just be 50, 000/20 because i=r?

nathan