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Unformatted text preview: ment yields: Mortgage payment = PV(Loan)/360-monthly annuity factor = €250K / (1/0.005 – 1/(0.005 · 1.005360)) = €1,498.87 Thus, a monthly mortgage payment of €1,498.87 is required to finance the purchase of the house. 3.7 Nominal and real rates of interest Cash flows can either be in current (nominal) or constant (real) dollars. If you deposit €100 in a bank account with an interest rate of 5 percent, the balance is €105 by the end of the year. Whether €105 can buy you more goods and services that €100 today depends on the rate of inflation over the year. Inflation is the rate at which prices as a whole are increasing, whereas nominal interest rate is the rate at which money invested grows. The real interest rate is the rate at which the purchasing power of an investment increases. The formula for converting nominal interest rate to a real interest rate is: (10) 1  real interest rate = 1+ nominal interest rate 1+ inflation rate For small inflation and interest rates the real interest rate is approximately equal to the nominal interest rate minus the inflation rate. Investme...
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This note was uploaded on 10/26/2012 for the course 19 19 taught by Professor - during the Spring '12 term at Sunway University College.

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