Question

Michael has been saving his money and wants to invest it. after doing some research, he has decided to invest $20,000 into a certificate of deposit. the interest rate on the cd is 3% with a term of five years, and the interest is paid out annually. based on recent inflation, michael is planning on an annual inflation rate of 2%. how much interest will michael earn on this cd in the first year, based on the nominal interest rate?

Answer 1

Answer: Micheal will earn an interest of $600 in the first year based on  nominal interest rates.

Since we need to compute the interest paid out at the end of year 1, we use the following formula in order to find the interest

$SI = P * N * R$

where

SI = Simple interest

P = Principal or initial amount invested

N = Number of years

R = Nominal interest rate

Nominal interest rate refers to the rate quoted on the CD or the rate agreed upon. In this question, the nominal interest rate is 3%.

Substituting the values in the formula above we get,

$SI = 20000 * 1 * 0.03$

$SI = 600$

Answer 2

Answer:

How much interest will michael earn on this cd in the first year, based on the nominal interest rate? $600

How much interest will Michael earn on this CD in the first year, based on the real interest rate?  $200

This is correct 100%