can you please tell me why dont we calculate this one like the questions in Q&A bank 3 ? I mean, why dont we first calculate the nominal i and then use it with the inflation rate to find the real rate by (1+i)/(1+inflation) ? Thanks a lot
You certainly can do. In which case you'd get nominal/money i = d +g. Hence the real rate is: i' = (d + g - e) /(1+e) as before. With constant inflation you have two ways of solving it. solve for the nominal/money rate and then use the i' = (i-e)/(1+e) formula or find the real value of each of the cashflows and then solve the equation of value to obtain the real rate. With non-constant inflation (ie an index) you can only use the second method.
