“Imagine you borrow $500 from your roommate, agreeing to pay her back $500 plus 7 percent nominal interest in one year. Assume inflation over the life of the contract is expected to be 4.25 percent. What is the total dollar amount you will have to pay her back in a year? What percentage of the interest payment is the result of the real rate of interest?”
Fundamentals of Corporate Finance, 4th Edition
Robert Parrino, David S. Kidwell, Thomas Bates, Stuart L. Gillan
Solution Available in MS-Word File.