1) As reported by the Bureau of Labor Statistics, the CPI for Airfare in 2263 wa
ID: 1216321 • Letter: 1
Question
1) As reported by the Bureau of Labor Statistics, the CPI for Airfare in 2263 was 559.6 (using a base year of 1914 = 100). The CPI for Airfare in 2264 was 605.7. Based on this data, what was the inflation rate of airfare from 2263 to 2264?
2) The bank is paying 9.06% compounded annually. The inflation is expected to be 11.58% per year.What is the inflation rate?
3) The bank is paying 9.97% compounded annually. The inflation is expected to be 8.41% per year.What is the market interest rate?
4) An economist has predicted 10.9% inflation during the next 14.0 years. How much will an item that presently sells for $22.0 bring 14.0 years later?
5) The bank is paying 25.5% compounded annually. The inflation is expected to be 12.09% per year.What is the inflation free interest rate?
6) You are paying a series of five constant-dollar (or real-dollar) uniform payments of $1195.38 beginning at the end of first year. Assume that the general inflation rate is 13.24% and the market interest rate is 13.24% during this inflationary period. The equivalent present worth of the project is:
Explanation / Answer
The difference in CPI from year 2263 to 2264 we have,(605.7-559.6)=46.1.
calculating the ratio of differnce to the CPI in 2263 and multiply by 100 to get percent
100*(46.1/559.6)=8.25%
So the inflation rate for 2263 is 8.25%.
2)The bank is paying 9.06% compounded annually. The inflation is expected to be 11.58% per year.
Nominal interest rate= Real interest rate+ Expected inflation rate.
Putting all values of compound/nominal interest rate and expected inflation rate we have,
Real interest rate=9.06-11.58=-2.52.
Another formula is,Real interest rate=Nominal interest rate-inflation rate.
So,Inflation rate=Nominal interest rate+Real interest rate=9.06-2.52=6.54%.
3)The bank is paying 9.97% compounded annually. The inflation is expected to be 8.41% per year.
Real interest rate=Nominal interest rate-epected inflation rate=9.97-8.41=1.56%.
So the market interest rate is 1.56%.
4) We know that,Future value=Principal value(1+interest rate)number of compounding periods.
=22(1+10.9)14.
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