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# Impacts on nominal interest rates

- Explain how inflation or purchasing power impacts stated or nominal interest rates.

- create a personal scenario that exemplifies the time value of money that includes the opportunity cost involved.

- Discuss the pros and cons of annuities when compared with other financial instruments and whether they provide a better investment opportunity for some people. Provide specific examples to support your response.

- Suggest a real-life example of how an annuity can be used for retirement planning.

#### Solution Preview

Interest Rate and Annuity Questions

- Explain how inflation or purchasing power impacts stated or nominal interest rates.

The real interest rate is adjusted to remove the effects of inflation from the nominal interest rate. Real Interest Rate = Nominal Interest Rate - Inflation. The real interest rate is based on the purchasing power growth rate determine from an investment. IF the nominal interest rate is adjusted to compensate for inflation, the purchasing power is at a constant level (The information was obtained at http://www.investopedia.com/terms/r/realinterestrate.asp). If your savings account earns 5% interest per year and inflation is currently at 3%, the real interest rate you will receive is 2% (5% - 3% = 2%).

- Create a personal scenario that exemplifies the time value of money that includes the opportunity cost involved.

I want to purchase a laptop for \$1,000, but before buying the laptop, I want to calculate the opportunity cost that I will lose. My savings account pays a 4 percent interest per year. The formula is the money spent multiplied by the interest rate lost and the time frame.

Opportunity cost (lost interest) = \$1,000 x 4% x 1 year = \$40

- Discuss the pros and cons of annuities when ...

#### Solution Summary

The solution discusses the impacts on nominal interest rates.

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