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VMariaS [17]
2 years ago
15

You lend​ $5,000 to a friend for one year at a nominal interest rate of​ 10%. Inflation during that year is​ 5%. As a​ result, y

ou will receive​ ________ at the end of the​ year, but that money has a purchasing power of​ ________.
Business
2 answers:
sukhopar [10]2 years ago
6 0

Answer:

$500, $250

Explanation:

You lend​ $5,000 to a friend for one year at a nominal interest rate of​ 10%. Inflation during that year is​ 5%. As a​ result, you will receive​ $<u>500</u> at the end of the​ year, but that money has a purchasing power of​ $<u>250</u>.

The nominal rate determines the amount that will received which is 10% of $5000 = $500

However the real rate determines the purchasing power of the amount to be received which is: Nominal rate - Inflation rate = Real rate,

Therefore the real rate = 10% - 5% = 5%

5% x 1000 = $250

Inflation is the single major factor that affects the purchasing power of money, hence the inflation effect must always be subtracted from any returns lenders are expecting, to get their real returns.

jarptica [38.1K]2 years ago
6 0

Answer:

As a​ result, you will receive​ <u>$5,500</u> at the end of the​ year, but that money has a purchasing power of​ <u>$5,238</u>.

Explanation:

At the end of the year, you will receive $5,000 x (1 + 10%) = $5,000 x 1.1 = $5,500. That is basically the future value of your money.

But in order to determine the purchasing power of that money, we must determine its present value using the inflation rte as our discount rate:

present value = future value / (1 + r) = $5,500 / 1.05 = $5,238.10 ≈ $5,238

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Compare and contrast the risks and goals of entrepreneurs and inventors.
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4 0
3 years ago
Read 2 more answers
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4 0
3 years ago
Lisa Richter deposited $5,000 at 4% compounded semiannually for three years. At the beginning of the fourth year, Lisa deposited
Contact [7]

Answer:

Answer is option (d) $8,424

Explanation:

The total amount Lisa Richter will receive after the end of the first 3 years can be expressed using the formula for calculating the total amount after 3 years with interest compounded semiannually is as follows;

A = P (1 + r/n)^(nt)

where;

A = the future value of the initial investment

P = initial investment amount/principal amount

r = the annual interest rate

n = the number of times that interest is compounded per unit t

t = the time the money is invested for

In our case;

P=$5,000

r=4/100=0.04

n=interest is compounded semiannually which is twice a year=2

t=3 years

Replacing values in the formula;

A=5,000(1+0.04/2)^(2×3)

A=5,000(1+0.02)^6

A=5,000(1.02)^6

A=$5,630.81

Total amount after the end of the first 3 years=$5,630.81

To calculate the total principal amount for the fourth year;

Total principal amount=Total amount after 3 years+Amount deposited at the beginning of the fourth year

where;

Total amount after 3 years=$5,630.81

Amount deposited at the beginning of the fourth year=$2500

replacing;

Total principal amount=(5,630.81+2500)=8,130.81

Using the formula;

A = P (1 + r/n)^(nt)

P=$8,130.81

r=4/100=0.04

n=compounded semiannually=2

t=1 year

replacing;

A=8,130.81(1+0.04/2)^(2×1)

A=8,130.81(1.02)^2

A=8,459.29

Option (d)  $8,424 is closer to 8,459.29, take answer as (d) $8,424

7 0
3 years ago
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