Question

Frank is lending $1,000 to Sarah for two years. Frank and Sarah agree that Frank should earn a real return of 4 percent per year. Instructions: a. The CPI (times 100) is 100 at the time that Frank makes the loan. It is expected to be 113 in one year and 127.7 in two years. What nominal rate of interest should Frank charge Sarah?

Answer 1

Answer:

nominal rate of interest is 31.7 %

Step-by-step explanation:

given data

payment = $1000

time = 2 year

rate = 4%

CPI = 100

CPI final yer = 127.7

to find out

nominal rate of interest

solution

we know nominal rate of interest formula that is

nominal rate of interest = real interest rate + inflation rate    .........1

so here inflation rate is express as

inflation rate = ( CPI final year - CPI )  / CPI  × 100    ...........2

put here value

inflation rate = ( 127.7 - 100 )  / 100  × 100

inflation rate is 27.7 %

so from equation 1

nominal rate of interest = real interest rate + inflation rate

nominal rate of interest = 4% + 27.7%

nominal rate of interest is 31.7 %