FMF9
Syllabus D. Investment Appraisal D2. Allowing for inflation and taxation in DCF

Money & Real Rates 2 / 4

Real Rate

The rate you receive, not taking into account inflation (you want inflation on top of the real rate)

Money / Nominal return

A real return on top of inflation. This is often the discount rate given in NPV questions

  • Formula:

    MONEY = REAL x INFLATION
    1+m = (1+r) x (1+inf)

Illustration

An investor wants a real return of 10%. Inflation is 5%
What is the MONEY/NOMINAL rate required?

  • 1+m = (1+r) x (1+inf)
    1+m = 1.1 x 1.05
    m = .155 = 15.5%