Question

You need to earn 6% annul real rate of return and, in addition, you need to keep up with the annual inflation rate. Exactly 4 years ago, the expected inflation rate was 2% per year. At that time, you decided to invest in a 7-year annuity with $20,000 deposited at the end of each year. Now, right after you made the 4th deposit, the expected annual inflation rate for the next 3 years is 3% per year. To keep your investment goal of 6% real annual return and keeping up with the new inflation rate, how much more each year for the last 3 years you will need to deposit in addition to the $20,000 per year to reach that goal?

Answer 1

Answer:

"4,000" is the appropriate option.

Explanation:

Given:

Real interest rate,

= 6%

Inflation rate,

= 2%

Annual deposit,

= $20,000

Now,

The nominal interest rate will be:

= $Real \ interest \ rate+Inflation \ rate$

= $6+2$

= $8$ (%)

As per the annual deposit, I was making,

= $20000\times 0.6$

= $1200 \ every \ year$

Inflation rate rise 3% i.e.,

= $2+3$

= $5$ (%)

Just to earn 1200, I have to:

= $\frac{1200}{0.05}$

= $24,000$

Thus the above is the appropriate answer.