Annual compound inflation rate


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

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

Problem 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?

Problem 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

Problem 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

Problem 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?

Problem 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?

Problem 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?

Problem 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?

Problem 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:

Problem 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%.

Problem 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?

Problem 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 ______.

Problem 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?

Problem 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?

Problem 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

Problem 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:

Problem 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.

Problem 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?

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Finance Basics: Annual compound inflation rate
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