Re: MGT411 GDB 1 Solution and Discussion
Total Marks 5
Starting Date Wednesday, June 03, 2020
Closing Date Monday, June 08, 2020
Question Title Nominal and Real Interest rate
SEMESTER SPRING 2020
Money and Banking (MGT411)
GDB No. 1
Due Date: June 08, 2020 Marks: 5
The objective of this question is to enable the students to understand the difference in nominal interest rate and real interest rate and its importance for lenders and borrowers.
It is important to understand the difference between nominal interest rate and real interest rate. Nominal interest rate is expressed in terms of current dollars as used in present value calculation where the purpose is to assess the amount of money you would pay today for fixed payments in the future. In case of borrowers and lenders; inflation is another important factor as they are concerned about the purchasing power of money and there is possibility that inflation may change the purchasing power of dollars. So there is a need to use inflation adjusted interest rate that is real interest rate. It equals to nominal interest rate minus inflation and expressed in terms of purchasing power. This phenomenon is best expressed by Irving Fisher in the form of Fisher equation that states that nominal interest rate ‘i’ is equal to real interest rate ‘r’ plus expected inflation ‘πe’.
Keeping this in mind; answer the following questions:
If there are equal chances of being paid back; whether 8% nominal interest rate is more attractive to a lender or 5% nominal interest rate? Explain your answer.
Also explain in the context of Fisher equation; what compensation a borrower is giving to a lender when he pays nominal interest rate?
Your discussion must be based on logical facts.
The GDB will remain open for 07 working days.
Do not copy or exchange your answer with other students. Two identical / copied comments will be marked Zero (0) and may damage your grade in the course.
Obnoxious or ignoble answer should be strictly avoided.
Questions / queries related to the content of the GDB, which may be posted by the students on MDB or via e-mail, will not be replied till the due date of GDB is over.
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