• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
Free ACCA & CIMA online courses from OpenTuition

Free ACCA & CIMA online courses from OpenTuition

Free Notes, Lectures, Tests and Forums for ACCA and CIMA exams

  • ACCA
  • CIMA
  • FIA
  • OBU
  • Books
  • Forums
  • Ask AI
  • Search
  • Register
  • Login
  • ACCA Forums
  • Ask ACCA Tutor
  • CIMA Forums
  • Ask CIMA Tutor
  • FIA
  • OBU
  • Buy/Sell Books
  • All Forums
  • Latest Topics

20% off ACCA & CIMA Books

OpenTuition recommends the new interactive BPP books for September 2025 exams.
Get your discount code >>

Please help me!

Forums › ACCA Forums › ACCA FM Financial Management Forums › Please help me!

  • This topic has 1 reply, 2 voices, and was last updated 4 years ago by Anonymous.
Viewing 2 posts - 1 through 2 (of 2 total)
  • Author
    Posts
  • April 21, 2021 at 10:13 pm #618437
    Joseph.Andrews
    Participant
    • Topics: 55
    • Replies: 27
    • ☆☆

    Please Sir help me with these two problems of mine!

    1) Is it true that according to Fisher Model assumption if there is an increase in interest rate it will instigate the increase in inflation rate (they move together) and eventually increase in interest & inflation rates will cause the local currency to depreciate more?

    2) If there is a depreciation in local currency against the foreign currency the exchange rate will be increasing against Foreign Currency like this:

    If Pound is Local Currency against Foreign Currency of $:
    Pound 1.50 / $1

    After depreciation caused by increase in interest & inflation in Local Currency:
    Pound 1.60 / $1

    April 22, 2021 at 6:59 am #618480
    Anonymous
    Inactive
    • Topics: 0
    • Replies: 4
    • ☆

    Hi,

    The fisher model looks at the relation between the real and nominal interest rates – essentially if there has been inflation in the economy (think of a rise in general prices), the value of money essentially comes down (think £1 in 2005 vs £1 in 2021)
    What then happens is the REAL rate of return for any investment is compromised

    If I issued a loan of £100 with an interest rate of 5%. I would need £5 annually as my real return to satisfy the 5% rate.

    If there was no inflation in the economy, the £5 satisfies the condition of 5%

    However, due to general inflation – the £5 interest received has actually lost value over the past year.

    In order to incorporate inflation to find out what we must receive as return, we use the fisher formula:

    ( 1 + Real Rate ) * ( 1 + Gen. inflation) = (1 + Nominal Rate)

    So, in this example if I wanted 5% REAL return, but there was a general inflation rate of 3% in the economy, the nominal rate that I should ask for would be

    ( 1+ 0.05 ) * (1 + 0.03 )

    = 1.0815

    Therefore, if I were to issue a loan of £100 and wanted a REAL return of 5%, in an economy where the general inflation is 3%, I would ask for the interest at 8.15%, to compensate for the inflationary effect on the currency value.

  • Author
    Posts
Viewing 2 posts - 1 through 2 (of 2 total)
  • You must be logged in to reply to this topic.
Log In

Primary Sidebar

Donate
If you have benefited from our materials, please donate

ACCA News:

ACCA My Exam Performance for non-variant

Applied Skills exams is available NOW

ACCA Options:  “Read the Mind of the Marker” articles

Subscribe to ACCA’s Student Accountant Direct

ACCA CBE 2025 Exams

How was your exam, and what was the exam result?

BT CBE exam was.. | MA CBE exam was..
FA CBE exam was.. | LW CBE exam was..

Donate

If you have benefited from OpenTuition please donate.

PQ Magazine

Latest Comments

  • umangkumbhat on What is Assurance? – ACCA Audit and Assurance (AA)
  • ahmadhoney on How to register with ACCA?
  • John Moffat on Interest rate risk management (1) Part 5 – ACCA (AFM) lectures
  • osman-the-zephyr@ on MA Chapter 1 Questions Accounting for Management
  • adebusola on MA Chapter 1 Questions Accounting for Management

Copyright © 2025 · Support · Contact · Advertising · OpenLicense · About · Sitemap · Comments · Log in