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Compute the inflation adjusted money rate

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Question - Bank Ltd lends Kshs. 1M to a borrower for 1 year. The borrower promises to repay the principal + interest of Kshs. 155,000, in one year time. The bank estimates that rate of inflation during the forthcoming year will be 5% which has been factored in the interest above.

Required -

a) Compute (i) The inflation adjusted money rate (m) (ii) The real interest rate (r).

b) What is the relationship between the money rate (m), real rate (r) and inflation rate (i).

c) What's the significance of the above relationship in capital budgeting or investment decisions.

Reference no: EM132845303

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