Real versus Nominal Rates. You will receive $100 from a savings bond in 3 years. The nominal interest rate is 8%.
a. What is the present value of the proceeds from the bond?
b. If the inflation rate over the next few years is expected to be 3%, what will the real value of the $100 payoff be in terms of today’s dollars?
c. What is the real interest rate?
d. 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).