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nism-series-xb-real-discount-rate-8-percent-return-6-percent-inflation[ INVESTMENT ADVISER (LEVEL 2) ]

In Adil's case, investment return is 8% p.a. and inflation is 6% p.a. What is the exact real discount rate used in the present value formula: '=PV(Rate, Nper, Pmt)'?

[ A ]2.00%

[ B ]1.50%

[ C ]0.93%

[ D ]1.89%[ CORRECT ]

Takeaway

With an 8% investment return and 6% inflation, the exact geometric real discount rate used in Adil's case is 1.89%, so option D is correct.

Derivation

Real Rate = ((1 + 0.08) / (1 + 0.06)) - 1 = (1.08 / 1.06) - 1 = 0.0188679, or approximately 1.89%. This is the specific real rate that feeds into Adil's PV(1.89%, 30, -3,00,000) calculation for the present value of his family's living expenses, testing whether candidates apply the geometric real-rate formula to the correct 8%/6% input pairing for this case rather than confusing it with the different rate pairs used in the Jaspreet (9%/8%) or Mr. Z (11%/10%) scenarios elsewhere in this set.

Why the others fail

A — 2.00%

This is the simple subtraction result (8% - 6%), which ignores the exact geometric compounding formula and understates the true real rate.

B — 1.50%

This is an arbitrary, incorrect discount rate that does not result from applying the geometric real-rate formula to the stated 8% return and 6% inflation.

C — 0.93%

This is the real rate applicable when return is 9% and inflation is 8% (Jaspreet's case), not the 8%/6% pairing used here for Adil.