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Tackling the Cost of Living Crisis
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Banking Essentials - Part I
This pathway will walk us through the basics of banks, starting with some of the different types and their main functions, then starting to look at the regulation faced by the banks, both before and after the Global Financial Crisis.
Greenwashing
Greenwashing is the act of distributing false information about something being more environmentally friendly than it actually is.
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Build, scale and manage your organisation’s learning
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Tackling the Cost of Living Crisis
In this video, Max discusses the cost-of-living crisis currently enveloping the UK. He examines its impact on households as well as the overall economy.
CSR and Sustainability in Financial Services
In the first video of this two-part video series, Elisa introduces us to sustainability. She begins by looking at the difference between sustainability and corporate social responsibility, two terms that can be easily confused.
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Mark Homans
Our sky high NPS following learner feedback speaks for itself - this platform has delivered a lot of value.
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Calculating Real Returns
Abdulla Javeri
30 years: Financial markets trader
Chances are when someone quotes a figure for investment returns it’s likely to be on a nominal or gross basis, without taking into account the effects of inflation. Purchasing power only increases if returns outstrip inflation over a given period. Abdulla addresses this fact and explains how to measure real returns for a single period, and over time, to help us understand inflation-adjusted returns.
Chances are when someone quotes a figure for investment returns it’s likely to be on a nominal or gross basis, without taking into account the effects of inflation. Purchasing power only increases if returns outstrip inflation over a given period. Abdulla addresses this fact and explains how to measure real returns for a single period, and over time, to help us understand inflation-adjusted returns.
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Calculating Real Returns
4 mins 42 secs
Real returns are in other words, inflation adjusted returns. Over the long-term, it’s important to consider the impact of inflation on returns to determine if we are wealthier. We increase our purchasing power or wealth, if our returns outstrip inflation over a given period.
Key learning objectives:
Identify the two methods in calculating real returns
Use the calculation to determine if wealth has increased or decreased
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What are the two methods of calculating real returns?
- Fisher Effect Equation: Nominal rate - Inflation Rate. However, this disregards the effect of time
- Real Rate = (1+ Nominal rate) / (1+ Inflation rate) - 1
Real returns impact which parties?
Real returns are good for savers and investors. However, if you’re a borrower, you would prefer negative real rates, because it means you’re paying back devalued money.Using the information in the table, how do we calculate the inflation index, inflation rate, fisher, real rates and investment?
| Years | Inflation Index | Nominal Rates/Returns | Inflation Rate | Fisher | Real Rates | Investment |
| 0 | 100.00 | 100.00 | ||||
| 1 | 102.00 | 5.00% | 2.00% | 3.00% | 2.94% | 105.00 |
| 2 | 104.50 | 3.00% | 2.45% | 0.55% | 0.54% | 108.15 |
| 3 | 107.00 | 6.00% | 2.39% | 3.61% | 3.52% | 114.64 |
| 4 | 109.20 | 2.00% | 2.06% | -0.06% | -0.05% | 116.93 |
| 5 | 113.00 | 7.00% | 3.48% | 3.52% | 3.40% | 125.12 |
- Inflation Rate
- Year 1: (102/100) -1 = 2%
- Year 2: (104.5/102) -1 = 2.45%
- Fisher: (Nominal rate - Inflation rate)
- Year 1: (5% - 3%) = 2%
- Year 2: (3%-2.45%) = 0.55%
- Real Rate
- Year 1: (1+ 0.05) / (1 + 0.02) - 1 = 2.94%
- Year 2: (1+0.03) / (1+ 0.0245) - 1 = 0.54%
- Investment
- Year 1: 100 x (1+0.05) = 105
- Year 2: 105 x (1+ 0.03) = 108.15
Have we increased our wealth over this 5-year period?
- Nominal Return (5Yrs): (125.12/100) - 1 = 25.12%
- Inflation (5Yrs): (113.00/100.00) - 1 = 13%
- Annualised 5-Year Real Return: (1+0.2512) / (1+ 0.13)⅕ -1 = 2.0581%
Given those returns and those inflation rates, we have increased our wealth, on average, by 2.0581% above inflation.
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Abdulla Javeri
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