(1 + nominal) real Solving for the Real Rate of Interest (1 + inflation) You have managed to build up your savings over the three years following your graduation from college to a respectable P100,000 and are wondering how to invest it. Your banker says they could pay you 5% on your account for the next year. However, you recently saw on the news that the expected rate of inflation for next year is 3.5%. If you are earning a 5% annual rate of return but the prices of goods and services are rising at a rate of 3.5%, just how much additional buying power would you gain each year? Stated somewhat differently, what real rate of interest would you earn if you made the investment?
(1 + nominal) real Solving for the Real Rate of Interest (1 + inflation) You have managed to build up your savings over the three years following your graduation from college to a respectable P100,000 and are wondering how to invest it. Your banker says they could pay you 5% on your account for the next year. However, you recently saw on the news that the expected rate of inflation for next year is 3.5%. If you are earning a 5% annual rate of return but the prices of goods and services are rising at a rate of 3.5%, just how much additional buying power would you gain each year? Stated somewhat differently, what real rate of interest would you earn if you made the investment?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Determinants of Interest Rates
Problem Illustration:
(1 + nominal)
1
Solving for the Real Rate of Interest real
(1 + inflation)
You have managed to build up your savings over the three years
following your graduation from college to a respectable P100,000
and are wondering how to invest it. Your banker says they could
pay you 5% on your account for the next year. However, you
recently saw on the news that the expected rate of inflation for
next year is 3.5%. If you are earning a 5% annual rate of return
but the prices of goods and services are rising at a rate of 3.5%,
just how much additional buying power would you gain each
year? Stated somewhat differently, what real rate of interest
would you earn if you made the investment?
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