(real and nominal rates) You have been depositing $250 per month in your 401k account for...

(real and nominal rates) You have been depositing $250 per month in your 401k account for exactly 10 years. The current value is $65,000. What is the annualized nominal return (effective annual rate) on your investment? If the inflation rate has averaged 6% over that time period, what is your annual real rate of return.

Solutions

Expert Solution

Solution:

Payment per period = 250, total period = 12 month *10 = 120 period, Future value = 65,000

We knoe the formula for future value of annuity

FV = P * [(1+r)^n - 1] / i

We can use excel and goal seek to find the interest rate .

Calculate the value using any random interest rate then use goal seek to set the future value to 65000 by changing interest rate cell.

We can see that annual interest comes out to be 14.06%

Nominal rate of return =14.06%

Real rate of return = Nominal - inflation = 14.06% - 6% = 8.06%

jeff jeffy answered 1 year ago

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