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Date Posted: 03:43:42 09/19/01 Wed
Author: Pete DaDalt
Subject: Re: Chapter 7 problem 7.5
In reply to: Marcus 's message, "Chapter 7 problem 7.5" on 17:28:12 09/18/01 Tue

Marcus:

The key thing to remember with real/nominal rate problems is the equation

(1+ nominal) = (1+real)x(1=inflation)

Solving for the real rate, you get:

real = (1+nominal)/(1+inflation) - 1

In this problem, The nominal rate is 8%, and inflation is 5%. Remember -- when using a formula, you enter 8% as .08, but when using the Time Value functions in the calculator, you enter it as 8.

Hope this helps.

>The question is: The intereset rate in financial
>markets on US Tresury bills is 8 percent and the
>expected inflation is 5 percent. What is the real
>rate of interest? Who can help me with this problem?

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