IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Allowing for inflation
If the real rate of interest is 3% per annum and inflation is 5% per annum, which of the following is the money rate of interest per annum?
The money rate is 8.15% per annum. Multiply one plus the real rate by one plus the inflation rate, 1.03 times 1.05 equals 1.0815, then subtract one. Adding the two rates to get 8% ignores the compounding cross-term and is wrong.
- A2.00%
- B8.00%
- C8.15%Correct
- D1.94%
- 15.00%
Explanation
Money rate = 1.03 x 1.05 - 1 = 0.0815, i.e. 8.15%. The 8.00% option adds the rates and ignores the cross-product.
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