Question

The outstanding bonds of Roxxon, Inc. provide an annual real rate of return of 4.0 percent. If the nominal rate of return is 5.1 percent, what is the inflation rate under the precise Fisher Effect? a.1.011 %b.1.100 %c.1.058 %d.9.304 % e.9.895 %

Answer 1

Answer:

c. 1.058%

Explanation:

According to the precise Fisher Effect, the real interest rate (r) is given as a function of the nominal rate (n) and the inflation rate (i) as follows:

$r=\frac{1+n}{1+i} -1$

If r =0.04 and n = 0.051, the value if the inflation rate is:

$0.04=\frac{1+0.051}{1+i} -1\\1.04i +1.04= 1.051\\i=0.01058=1.058\%$

The inflation rate is 1.058%.

Answer 2

Answer:

c. 1.058 %

Explanation:

The formula for precise Fisher effect is given as;

r = {( 1+i)÷(1+π)} -1

Therefore the solution is

r = {(1+5.1)÷(1+4.0)}-1

r = 1.058%