Twenty years ago John invested $7,500 in a mutual fund. The value of his investm
ID: 2768631 • Letter: T
Question
Twenty years ago John invested $7,500 in a mutual fund. The value of his investment declined by 19% during the first year and then declined another 30% during the second year. Eighteen more years have passed, and John's cumulative return over the 20-year period is a 505%. Click the icon to view the interest and annuity table for discrete compounding when i = 5% per year. What is the value of the original investment now? The value of the original investment now is $. (Round to the nearest dollar.) If inflation has averaged 5% per year over the past 20 years, what is the spending power equivalent of the answer to Part (a) in terms of real dollars 20 years ago? The spending power equivalent in terms of real dollars 20 years ago is $. (Round to the nearest dollar.) What is the real compound interest rate earned over the 20-year period? The real compound interest rate is %. (Round to two decimal places.) During the past 18 years, what compound annual rate of return (yield) was earned on John's investment? The compound annual rate of return is %. (Round to two decimal places.)Explanation / Answer
Part a)
Value of original investment now = original investment x (1+ cumulative return)
= 7,500 x (1+505%)
=7500 x 6.05
= 45,375
Part b)
Spending power equivalent to real dollars = Value of original investment now/ (1+i)^n
= 45,375 / (1+0.05)^20
= 17,101.36
Part c)
FV= PV/ (1+r)^n
17,101.36 = 7500/ (1+r)^20
(1+r)^20 = 2.28018
1+r= 1.0421
R= 4.21%
So real compound interest rate is 4.21%.
Part d)
Value of investment after first 2 years = 7500 x (1-0.19) x (1-0.30)
= 4252.50
FV= PV/ (1+r)^n
45375 =4252.50 / (1+r)^180
(1+r)^18 = 10.670194
1+r= 1.1406
R= 14.06%
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.