An investor deposits $1,000 into a high yield account when the market rate is 7% per...

An investor deposits $1,000 into a high yield account when the market rate is 7% per year and the inflation rate is 2% per year. The account is left undisturbed for 8 years (a) How much money will be in the account at the end of year 8? (b) What will be the purchasing power of your answer in part (a) in terms of today’s dollars?

Please show work no excel thank you!

Solutions

Expert Solution

a) At the end of 8 years, the account will have:

dollars

Here, r is 7%, the nominal interest rate. n = 8 years

FV = $1718.19

The account will have $1718.19 after 8 years.

b) The amount above is based on the nominal interest rate, i.e., 7%

To bring the amount to today's terms, and adjust for inflation, it must be deflated accordingly:

Here, r will be taken as 2% to account for inflation.

PV = $1466.53

Thus, in today's dollar terms, the amount is worth only $1466.53.

This is due to the inflation rate of 2%, over 8 years.

Rahul Sunny answered 1 year ago

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