Mr. X invested $5,000 for a period of 2 years. The investment plan offered a nominal rate of return of 6% on the investment.
-Refer to the scenario above. If the long-run average inflation rate is 3%, the real value of his investment in today's dollars is ____.
A) $5,304.50
B) $5,618.00
C) $10,430.50
D) $15,612.00

Question

Quizplus · Accepted Answer

The real value of the investment can be calculated using the formula for the real rate of return, which adjusts the nominal rate for inflation. The nominal rate is 6%, and the inflation rate is 3%. The real rate of return can be calculated as $ \frac{1 + nominal\ rate}{1 + inflation\ rate} - 1 $. Substituting the given rates: $ \frac{1 + 0.06}{1 + 0.03} - 1 = \frac{1.06}{1.03} - 1 \approx 0.029126 $ or 2.91%. Applying this real rate over 2 years to the initial investment of $5,000 gives the future value as $ $5,000 \times (1 + 0.029126)^2 \approx $5,304.50 $.

Mr X Invested $5,000 for a Period of 2 Years