Given a nominal rate of 26% and an inflation rate of 12%, the real rate can be __________?
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Answer: C. 12.50%
Explanation
The real rate is calculated using the Fisher equation by dividing one plus the nominal rate by one plus the inflation rate, then subtracting one. Dividing one point two six by one point one two gives one point twelve five, resulting in twelve point five zero percent. The real interest rate reflects the true purchasing power growth of an investment after removing the effects of inflation. It is essential for accurate long-term capital budgeting.
Financial analysts adjust nominal returns for inflation when evaluating long-term projects to avoid distorted profitability forecasts. This ensures economic viability under changing price levels. Other options result from simple subtraction of inflation from nominal rates or incorrect formula applications. Values like thirteen point seven five percent miscalculate the proportional adjustment.
- Subject
- Accounting and Finance
- Category
- Accounting
- Topic
- —
- Difficulty
- medium
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