Skip to content

NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Time Value of Money

A fixed deposit gives a nominal return of 10% per annum while consumer price inflation is 6% per annum. Using the exact (Fisher) relationship, what is the real rate of return, to two decimals?

The real rate of return is 3.77%. The exact Fisher relationship divides one plus the nominal rate by one plus inflation, so 1.10 divided by 1.06 minus 1 gives about 3.77%, slightly below the simple 4% difference.

  1. A4.00%
  2. B3.64%
  3. C3.77%Correct
  4. D16.60%

Explanation

Real rate = (1 + nominal) / (1 + inflation) - 1 = 1.10 / 1.06 - 1 = 3.77%. Simply subtracting gives 4.00%, which ignores that inflation also erodes the return itself. Dividing the difference by 1.10 gives 3.64%, using the wrong base. 16.60% multiplies instead of dividing.

Did you get it right without looking?

One question tells you little. A timed set on Time Value of Money shows your real accuracy, how long you take and where you lose marks.

Practise Time Value of MoneyFree diagnostic mock

More Time Value of Money questions