KIC000016 - ,. Inflation Defined Inflation is an increase...

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,... Risk and Return I Real and Nominal Returns The Inflation rate: i The aruma! percent increase in the price level. Nominal Interest Rate: R The interest rate paid on debt securities without an adjustment for any loss in purchasing power. Real Interest Rate: r The nominal rate of interest less any loss in purchasing power of the dollar during the time of the investment. Real and Nominal Returns: Example Your stock portfolio earned 10.5% over the last year. If the rate of inflation last year was 3.1 %, then what real rate of return did you earn? 1 (1+R) +r= (1+i) 1 +r = (1.105) (1.031) 1+r=1.0718 r= 7.18% Inflation Defined Inflation is an increase in the general price level. The general price level is periodically measured from a standard basket of goods. The Inflation Rate is the annual percent change in the price level. The most often quoted inflation measure is the rate of change in the Consumer Price Index. Real and Nominal Returns
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This note was uploaded on 09/07/2011 for the course FINANCE 320 taught by Professor Sapp during the Fall '10 term at Iowa State.

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KIC000016 - ,. Inflation Defined Inflation is an increase...

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