Real Rates: Judging Discount Rates And Inflation Hedges

One technique to analyze future investment performance is the real rate of return analysis. A real rate of return (real discount rate) is the investment return after deducting the costs of inflation. It can be either realized or prospective. As can be seen by examining past interest rate movements,...

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Bibliographic Details
Published in:The Appraisal journal 1990-01, Vol.58 (1), p.23
Main Author: Barnes, Kenneth A
Format: Article
Language:English
Subjects:
Capitalization
Discount rates
Discounted cash flow
Inflation rates
Investment
Nominal
Present value
Property values
Rates of return
Real
Real estate
Real estate appraisal
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Summary:One technique to analyze future investment performance is the real rate of return analysis. A real rate of return (real discount rate) is the investment return after deducting the costs of inflation. It can be either realized or prospective. As can be seen by examining past interest rate movements, the return that motivates investors is the expected real return. When expected inflation increases, the nominal rate of return demanded by investors increases. When anticipated inflation falls, so does the demanded nominal return. Real rates are useful to the appraiser as a check of the reasonableness of nominal discount rates. Real rates are also useful evaluation tools, especially when comparing various investments to model their performance in different inflation environments.
ISSN:0003-7087