**Question 155** inflation, real and nominal returns and cash flows, Loan, effective rate conversion

You are a banker about to grant a 2 year loan to a customer. The loan's principal and interest will be repaid in a single payment at maturity, sometimes called a zero-coupon loan, discount loan or bullet loan.

You require a **real** return of **6**% pa over the two years, given as an effective annual rate. Inflation is expected to be **2**% this year and **4**% next year, both given as effective annual rates.

You judge that the customer can afford to pay back $**1,000,000** in **2** years, given as a **nominal** cash flow. How much should you lend to her right now?