Becky is seeking to expand her rare coin collection.Each year,rare coins increase in price at a three percent rate.She believes that if she invests her money for one year,she should be able to buy 26 coins for what 25 coins would cost today.What is the approximate nominal rate necessary to compensate for waiting and to cover inflation?

Question

Quizplus · Accepted Answer

To buy 26 coins for the price of 25 after a year, Becky needs a return that not only compensates for the 3% inflation but also allows her to buy an extra coin with the same amount of money. This means she needs a 4% increase (1 extra coin out of 25) on top of the 3% inflation, totaling a 7% nominal rate.

Becky Is Seeking to Expand Her Rare Coin Collection