Question

an account valued at 200000 after 10 years how much (in then-current dollars) will be in the account if the real rate of return is 6% per year and the inflation rate is 3.78%

Answer 1

Inflation rate = 3.78%

Real rate = 6%

Time = 10 years

The nominal interest rate can be calculated through the formula below

Nominal rate = (1 + Real rate ) (1 + inflation rate) – 1

                        = (1 + 6%) (1 + 3.78%) – 1

                        = 1.06 × 1.0378 – 1

                       = 1.100068 – 1

                      = 0.100068 × 100 = 10%

Calculation of value of account after 10 years

=   

= 200,000 ( 1 + )¹⁰

=200,000 (1 + 0.1 )¹⁰

=200,000 (1.1)¹⁰

= $518,748

Thus the value of account after 10 years is $518,748.