On January 1, 2011, Albert invested $10,000 at 6 percent interest per year for t
ID: 1179151 • Letter: O
Question
On January 1, 2011, Albert invested $10,000 at 6 percent interest per year for three years. The CPI on January 1, 2011, stood at 100. On January 1, 2012, the CPI (times 100) was 105; on January 1, 2013, it was 110; and on January 1, 2014, the day Alberts investment matured, the CPI was 118. Find the real rate of interest earned by Albert in each of the three years and his total real return over the three-year period. Assume that interest earnings are reinvested each year and themselves earn interest.
Explanation / Answer
EFFECTIVE AMOUNT = (TOTAL AMOUNT/CPI OF PREVIOUS YEAR)*CPI OF CURRENT YEAR
YEAR CPI AMOUNT INVESTED INTEREST TOTAL AMOUNT EFFECTIVE AMOUNT 2011 100 10000 0 10000 10000 2012 105 10000 600 10600 11130 2013 110 11130 668 11798 12360 2014 118 12360 742 13101 14054Related Questions
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