Nominal Hurdle Rate Vs Real Hurdle Rate

imdad1 · 07-20-2010, 08:07 PM

its simple!

Nomial rate is rate adjusted for inflation effect!!

its formula is (1+nomial rate)=(1+Real rate)(1+inflation rate)

now for understanding lets assume u give me 10 million to me today at interest premium of 20%(without inflation return) than if i return u 12 million after one year what will be your reaction in the following three enviroments

1) a country with no inflation

2) a country with inflation of 20%

3) a country with inflation of 50%

off course in 3rd case u would not be happy as the return given by the borrower does not even cover the inflation impact!! thus in reality u are making a loss..

and thus in order to adjust the return for inflation effect nomial rate is computed...so that the investor is given an adequate return...

the second implication of nomial return and real return come when we are doing financial management as when we are making decision about investing in the project of not.. so we plot cash flows

if we are plotting nomial cash flows they would be discounted using nomial rate!
and if we are using real cash flows they would be discounted using real rate

in order to compute the Net Present value (NPV)

This rule is called LIKE for LIKE

i hope the above discussion would be beneficial..!! )
thanks and regards
IMDAD ALI SHAH BUKHARI

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by sania.saeeed
 Plz someone guide me the real difference between the two with an easy to understand example [?]
<hr height="1" noshade id="quote"></blockquote id="quote">