Elizabeth 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, the investment must grow by 4% (26/25 - 1). With a 3% inflation rate, the nominal rate needed is approximately 7% (1.04 * 1.03 - 1 ≈ 0.0702 or 7.02%).

Elizabeth Is Seeking to Expand Her Rare Coin Collection