Question

A municipal bond that matures in one year has a $5,000 face value and is currently priced at $4,650.00. Calculate the interest rate for this bond to two decimals.
    %

Part 2   (1 point)

See Hint

Suppose that inflation is exactly 1.00%. Calculate the real interest rate to two decimals.
    %

Answer 1

Solution:-

Here Given,

FV = $5,000

PV = $4,650

n = 1 year

r = ?

1) FV = PV(1+r)^n

Put the value of above formula:

5,000 = 4,750 (1+r)^1

5,000/4,750 = (1+r)^1

1.05263 =1+r

r = 1.05263 – 1 = .05263

r = 5.26%

2) Real Interest rate = r-g/1+g

                                =0.0526 – 0.03/1+0.01

                                =0.0226/1.01

                                = 0.0224

                                =2.24%

Real Interest rate = 2.24%