Nominal Interest rates

CFA Level II
#1

CFAI book Corp Finance Page 38 says, In general, the relationship between real and nominal rates is (1 + Nominal rate) = (1 + Real rate)(1 + Inflation rate) fisher effect says Nominal interest rate = Real rates + inflation Which one is it? Thanks

#2

Both! That fisher effect equation is an approximation of the first equation (which is the correct one, mathematically). It will generally hold under low inflation.

Just need to know the fisher effect for Economics, else use the first equation (but likely both should get you a good enough answer).

#3

thanks!