05-09-2007, 07:19 PM
Well Another Aspect to this Real rates of return and nominal ratres of return Well i think all of us have spoken about the inflation factor but there is just one more aspect..
Financial Institutions normally quote rates say 10 % per annum with interest paid half yearly So the nominal rate here would be 10 % but the actuall rate of return is calculated as
Since interest is paid half yearly the interest paid would actually be 5% per half now the real rate is computed by
1+.05 (being the interest paid per half) square it up since interest is paid twice in the year if interest was paid quarterly then we would have multipilied the factor 4 times since interest paid 4 times a year . Now the Answer - 1 and X by 100 thats the real rate of return. Let me do this one
1.05X1.05 = 1.1025
1.1025-1=.1025
.1025X100= 10.25% which is the actual rate of return
Financial Institutions normally quote rates say 10 % per annum with interest paid half yearly So the nominal rate here would be 10 % but the actuall rate of return is calculated as
Since interest is paid half yearly the interest paid would actually be 5% per half now the real rate is computed by
1+.05 (being the interest paid per half) square it up since interest is paid twice in the year if interest was paid quarterly then we would have multipilied the factor 4 times since interest paid 4 times a year . Now the Answer - 1 and X by 100 thats the real rate of return. Let me do this one
1.05X1.05 = 1.1025
1.1025-1=.1025
.1025X100= 10.25% which is the actual rate of return
