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# Inflation, rate of return

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1. If the CPI today is equal to 135 and five years ago it was 105, then the annual compound inflation rate is approximately

2. A deposit of \$1,000 invested at 3.75%, compounded annually, will be worth approximately how much at the end of 5 years?

3. Assume that a proposed investment will generate revenue of \$3,000 at t + 3. In addition, assume that the annual interest rate will be 10% in each of the next four years. If the net present value of the investment is \$1200 and the cost of the investment will be incurred in t+1, what is the dollar cost of the investment in t+1?

4. If the current nominal interest rate is 6.25%, and the expected inflation rate for the coming year is 2.25%, then the expected real interest rate is

5. Suppose the nominal interest rate one year ago was 6.50%. If the ex post inflation rate over the last year was 2.50%, then the realized real interest rate for the past year was

6. Social Security payments are indexed to the annualized CPI inflation rate. If your grandparents receive a monthly check of \$1,500 in 2004, what will be the approximate amount of their monthly check in 2020 if the assumed CPI inflation rate is 4 percent per year over the next 16 years?

7. If a bond with a face value of \$1,000 has an 8 percent annual coupon rate, a five-year maturity, and similar bonds are currently selling for a 7 percent yield-to-maturity, the current price of the bond is approximately?

8. You invested in a bond one year ago for \$1,000. The bond pays an annual interest of \$55. Today, after receiving the coupon payment, you decide to sell the bond at the current market price of \$985. What is your realized annual rate of return?

9. At time t, Joan puts \$2,000 into a mutual fund A. In the next five years, the compound annual rate of return is predicted to be 12%. How much does she expect to have in the mutual fund in t+5?

10. Assume the following data describe an investment:
Cost(t)= \$5,575
Revenue(t+5)= \$9,050
The compounded annual rate of return on the investment is approximately:

11. If the ex post rate of inflation is 3% for some time period, while the expected rate of inflation for the same time period had been 2%,

12. Assuming that the expected real rate of interest remains unchanged at 2 percent, if the level of the nominal interest rate increases from the current level of 3 percent to 5 percent, which of the following statements can explain the increase in the nominal interest rate?

13. An individual borrowed money at 10 percent when the expected rate of inflation was 5 percent. During the year the actual rate of inflation turns out to be 3 percent. The borrower's expected real rate of interest was _____ and the ex post or realized real rate of interest for the borrower was ______.

14. Consider the following proposed investment. The cost of the investment is \$850 today, and the revenue received is \$1000 in three years. Should you undertake the investment today, when an alternative investment opportunity with identical characteristics yields a 6.5% annual rate of return?

15. A Treasury bond matures in one year, at which time it will pay \$60 interest. It has a face value of \$1,000. If the current market price of this bond is \$980.00, what is the approximate market rate today on newly issued one-year Treasury securities?

16. Assume the dollar revenue of an investment is \$10,000 in t + 4, its dollar cost in t is \$8,548 and the interest rate is 4%. The present value of the investment is approximately

17 If the rate of interest on a corporate bond is 7.9%, then the rate of interest on a Treasury bond with the same maturity must be:

18. You will retire in 15 years. How much money do you need to invest in your 401K plan today in order to have \$100,000 at retirement? The interest rate in your 401K plan is 6.5% per year.

19. You invested \$1,000 in a money market fund three years ago. The cash in your account today is \$1,160. You earned interest at the following rates in the first two years: 5.05% in the first year, 6.15% in the second year. What is the rate you earned in the third year?

#### Solution Preview

Questions below ; answers in the attached file.

1. If the CPI today is equal to 135 and five years ago it was 105, then the annual compound inflation rate is approximately

2. A deposit of \$1,000 invested at 3.75%, compounded annually, will be worth approximately how much at the end of 5 years?

3. Assume that a proposed investment will generate revenue of \$3,000 at t + 3. In addition, assume that the annual interest rate will be 10% in each of the next four years. If the net present value of the investment is \$1200 and the cost of the investment will be incurred in t+1, what is the dollar cost of the investment in t+1?

4. If the current nominal interest rate is 6.25%, and the expected inflation rate for the coming year is 2.25%, then the expected real interest rate is

5. Suppose the nominal interest rate one year ago was 6.50%. If the ex post inflation rate over the last ...

#### Solution Summary

Answers questions on annual compound inflation rate, dollar cost of investment , nominal interest rate, real interest rate, realized real interest rate, current price of the bond, realized annual rate of return, compounded annual rate of return on investment.

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