Page 443 - FM Integrated WorkBook STUDENT 2018-19

Answers

Chapter 4

Question 1

Real and money rates

An investor requires a real return on their investment of 12%, but in addition will
need to be compensated for anticipated inflation of 3%.

Calculate the money rate of return required by the investor.

(1 + i) = (1 + r)(1 + h)

r = 0.12, h = 0.03

1 + i = 1.12 × 1.03 = 1.1536

i = 0.1536 or 15.36%

Question 2

Real and money rates

If an investment pays interest of 5.5% and the general rate of inflation is 3%,
what is the real return on the investment?

(1 + i) = (1 + r)(1 + h)

i = 0.055, h = 0.03

1.055 = (1 + r) × 1.03

1 + r = 1.055/1.03 = 1.024

r = 0.024 or 2.4%

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