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Chap005

# Chap005 - CHAPTER 5 Learning About Learning Return and Risk...

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Investments Bodie, Kane and Marcus CHAPTER 5 CHAPTER 5 Learning About Learning About Return and Risk Return and Risk from the from the Historical Record Historical Record

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5-2 Factors Influencing Rates Supply Households Demand Businesses Government’s Net Supply and/or Demand Federal Reserve Actions
5-3 Real and Nominal Rates of Interest Nominal interest rate Growth rate of your money Real interest rate Growth rate of your purchasing power If R is the nominal rate and r the real rate and i is the inflation rate: r R i = -

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5-4 Equilibrium Real Rate of Interest Determined by: Supply Demand Government actions Expected rate of inflation
5-5 Figure 5.1 Determination of the Equilibrium Real Rate of Interest

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5-6 Equilibrium Nominal Rate of Interest As the inflation rate increases, investors will demand higher nominal rates of return If E ( i ) denotes current expectations of inflation, then we get the Fisher Equation: ( ) R r E i = +
5-7 Taxes and the Real Rate of Interest Tax liabilities are based on nominal income Given a tax rate ( t ), nominal interest rate ( R ), after-tax interest rate is R (1- t ) Real after-tax rate is: (1 ) ( )(1 ) (1 ) R t i r i t i r t it - - = + - - = - -

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5-8 Comparing Rates of Return for Different
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