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Investment: Relevant Nominal Discount Rates and Inflation Rate

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You plan on depositing $10,000 a year in real terms into your investment account for the next 4 years. The relevant nominal discount rate is 7.5 % and the inflation rate is 4.2%. What are these deposits worth in today's dollars?

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Solution Summary

This is a solution calculating a deposit's worth based on nominal discount rates and inflation rate.

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The real rate of interest is approximated by taking the nominal interest rate and subtracting inflation. The real interest rate is the growth rate of purchasing power derived from an investment.

Thus, a person's nominal income is increasing even if the real income is decreasing due to inflation. In these cases the inflation is more ...

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