Given a nominal interest rate of 26% and an inflation rate of 12%, what is the approximate real interest rate?

Multiple choice question for Capital Budgeting and Cost Benefit Analysis. Select an option, then review the explanation below.

Explanation

To find the real interest rate, use the formula: Real Rate ≈ Nominal Rate - Inflation Rate. Here, 26% - 12% = 14%, but the exact calculation is (1 + 0.26) / (1 + 0.12) - 1 = 0.125 or 12.5%. Therefore, the correct answer is 12.50%.

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Given a nominal interest rate of 26% and an inflation rate of 12%, what is the approximate real interest rate?

Explanation

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