You will receive $100 from a savings bond in 3 years. The nominal interest rate

Question

You will receive $100 from a savings bond in 3 years. The nominal interest rate is 7.5% a. What Is the present value of the proceeds from the bond? (Do not round Intermedlate calculetlons. Round your answer to 2 declmal places.) Present value b. If the inflation rate over the next few years is expected to be 2.5%, what will the real value of the $100 payoff be In terms of today's dollars? (Do not round Intermedlete calculations. Round your answer to 2 declmal places.) Real value c.What is the real Interest rate? (Do not round Intermediate calculations. Round your answer to 3 decimal places.) Real Interest rate d. Show that the real payoff from the bond [from part (b)] discounted at the real Interest rate [from part (C)) gives the same present value for the bond as you found in part (a). Do not round Intermedlate calculatlons. Round your answer to 2 declmal places.) Present value

Explanation / Answer

=100/1.075^3=80.496
2.
=100/1.025^3=92.85994
3.
=1.075/1.025-1=4.878%
4.
Discounting part b) at rate from part c) we get =92.85994/1.04878^3=80.496 which is the same as part a)

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