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Tuesday, August 31, 2010

Why to invest in equity while debt is secured and offers sure returns

Though debt is more secure and offers sure returns in comparison to equity, but returns on debt is relatively less.

Also these returns are affected by Real Interest Rates in the hands of investors.

What is Real Interest Rate?

Real interest rate of an investment is the difference between nominal interest rate subtracted by the rate of inflation.

If an investment gives the interest return of 8 % per annum while inflation rate is 10% per annum, then resultant Real Interest Rate is -2%.

This is the persisting problem with majority of debt instruments, that’s why opportunities in equity instruments should be searched.

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