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2-4 Notes BF - • The Fisher Effect o The Fisher Effect...

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2/4/08 Business Finance Notes The rate of return given from the formula responds to the effective rate that corresponds to the period As risk of a bond increases, YTM increases as well. Inflation and Interest Rate o Real rate of interest Change in purchasing power o Nominal rate of interest Quoted rate of interest What you’re told that the interest rate should be
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Unformatted text preview: • The Fisher Effect o The Fisher Effect defines the relationship between real rates, nominal rates, and inflation o (1 + R) = (1 + r)(1 +h), where R = nominal rate r = real rate h = expected inflation rate o Approximation R = r + h See sample problems “2/4” #1 • Mid-term 1 o See “mid-term 1 review”...
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