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HKSI PrepStudyingPaper 1
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Ms Lau's one-year deposit pays a nominal 6% a year, and inflation over the year is 2%. Using (1 + nominal) = (1 + real) × (1 + inflation), what is her real rate of interest?
Rearranging the exact (Fisher) relationship, real rate = (1 + nominal) ÷ (1 + inflation) − 1 = 1.06 ÷ 1.02 − 1 = 0.0392, or 3.92%. 4.00% is the approximation, nominal minus inflation, which the stated formula replaces; the gap between the two grows as rates rise. 8.12% multiplies the two factors, 1.06 × 1.02 − 1, which adds inflation instead of removing it. 5.88% divides only the nominal rate by (1 + inflation), 6% ÷ 1.02, without subtracting inflation at all. Her purchasing power grows by 3.92% over the year. Source: Standard interest rate concepts (Fisher relation) (as at October 2026).
Reaching for the 'nominal minus inflation' shortcut when the question gives the exact formula. The shortcut slightly overstates the real rate.
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