You want to earn a 5.9% real rate of return on your investment. The projected in

Question

You want to earn a 5.9% real rate of return on your investment. The projected inflation rate is 2.3%. What nominal rate must you earn to meet your goal?

Enter answer in percents, accurate to 2 decimal places.

You earned 10.3 percent nominal rate over the past year, but find that your purchasing power in terms of real stuff you can buy with your money has increased only by 5.2 percent. What was the rate of inflation?

Enter answer in percents, accurate to 2 decimal places.

You just won a lottery, which will pay you 1 million dollars in 31 years. Assuming the inflation rate will be 2.7 percent per year over this time period, what will be the purchasing power of that 1 million, as measured in today's dollars?

Explanation / Answer

1) Real Rate of return = (7.9 - 2.3) x 100 / (102.3) = 5.47 %

2) (Nominal Rate - 2.3) x 100 / (102.3) = 5.9

=> Nominal Rate = 8.34 %

3) (10.3 - Inflation rate) x 100 / (100 + Inflation Rate) = 5.3

=> Inflation Rate = 4.75 %

4) Purchasing power today = 1 / (1.027)^31 = 0.43784082 million dollars = 437840.082 dollars

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