When discounting the expected spending need each year at the real risk free rate, the solutions show that the real risk free rate is calculated as [(1 + nominal risk free rate)/(1 + inflation rate)] - 1. However, Blue Box Example 4 Question 2 within Reading 10 calculates the real risk free rate as simply nominal risk free rate minus inflation rate. On the exam, would both methods of calculating the real risk free rate be acceptable? Depending on the method used, the capitalized value of core capital needs ends up being slightly different. Thanks!
the 1+/1+ method is for geometric
the nominal - real -> arithmetic method
on the exam they have been known to accept both,
but just be aware that the geometric is the MORE correct method … (and if it is a multi period thing - use the geometric).
(and if it is a multi period thing - use the geometric).
That’s my understanding…