Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Chapter 5, Problem 26P
Summary Introduction

To determine: The nominal interest rate.

Introduction:

The nominal rate refers to the rate before considering the inflation. Nominal rate may also refer to the published or declared interest rate on a loan, without considering any fees.

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Assume the nominal interest rate is 12 percent and the expected rate of inflation is 8 percent.  Calculate real rate of interest. Now assume instead that the nominal interest rate is 4 percent and the expected rate of       inflation is minus 2 percent.  Calculate the real rate of interest. Assume the expected rate of inflation is 6 percent per year. What nominal interest rate       should you charge to receive a real interest rate of 2 percent per year?
Suppose that you can make an annual profit of $600 on an investment of $4000. Suppose you borrow the investment amount at an annual interest rate of 8%. Your updated expectation of inflation is 6%. Then your gross real returns (before loan payment) is _____ and your net real returns (after loan payment) is ______.
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Chapter 5 Solutions

Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book

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