[3][4] When loans are made, the amount borrowed and the repayments due to the lender are normally stated in nominal terms, before inflation.
To calculate the true economics of the loan, it is necessary to adjust the nominal cash flows to account for future inflation.
This risk is one of the reasons inflation-indexed bonds such as U.S. Treasury Inflation-Protected Securities were created to eliminate inflation uncertainty.
[5] As detailed by Steve Hanke, Philip Carver, and Paul Bugg (1975),[6] cost benefit analysis can be greatly distorted if the exact Fisher equation is not applied.
Prices and interest rates must both be projected in either real or nominal terms.
The Fisher equation plays a key role in the Fisher hypothesis, which asserts that the real interest rate is unaffected by monetary policy and hence unaffected by the expected inflation rate.