536-2.2a_note[1]

536-2.2a_note[1] - 536-2.2a_note 11S Topic 2.2...

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536-2.2a_note, 11S FIN 536 – SU Page 1 of 7 Topic 2.2 International Parity Conditions (Chapter 7) I. Outline A. Introduction: Inflation B. Parity Condition 1. PPP 2. FE 3. IFE 4. IRP 5. UFH II. Homework Assignment Chapter 7 End-of-Chapter Question End-of-Chapter Problem (P) 7, 8, 14, 18 Exam Sample Problem (ES) 1-9 Supplementary Homework Problem (SH) 1-2 ========================================================= Class Notes I. Link 2: Inflation and Interest Rate – The Fisher Effect (FE) A. Review on Interest rate 1. Different Interest rates Time Line Nominal Rate (I NOM ) Periodic Rate (I PER ) Effective Annual Rate (I EFF ) Example: 10% annual compounding Example: 10% semiannual compounding Example: 10% Quarterly compounding

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536-2.2a_note, 11S FIN 536 – SU Page 2 of 7 2. Interest Rate Example: An investor receives \$1100 in one year in return for an investment of \$1000 now. What is the nominal rate under the following scenarios? Time Line Nominal Rate (I NOM ) Periodic Rate (I PER ) Effective Annual Rate (I EFF ) Annual compounding Semiannual compounding Quarterly compounding B. The nominal interest rate will include two components: 1. A real return rate that increases the purchasing power of the loaned funds 2. A return that offsets the loss of purchasing power due to expected inflation. C. FE Example: Find the real interest rate r (Nominal interest rate) a (real interest rate) π (inflation rate) US 2% 1.5% UK 5% 4.5% D. Exact form E. Approximate form
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536-2.2a_note[1] - 536-2.2a_note 11S Topic 2.2...

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