Problem: Real versus Nominal Rates. You will receive $100 from a savings bond in 3 years. The nominal interest rate is 8 percent.
If the inflation rate over the next few years is expected to be 3 percent, what will the real value of the $100 payoff be in terms of today's dollars?
What is the real interest rate?
Show that the real payoff from the bond (from part b) discounted at the real interest rate (from part c) gives the same present value for the bond as you found in part a.