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Aleonysh [2.5K]

3 years ago

14

Michael has been saving his money and wants to invest it. After doing some research, he has decided to invest $20,000 into a Cer

tificate 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 real interest rate? $200 $600 $1,000 $1,400
IT IS NOT $600!!! THE CORRECT ANSWER IS $200 ON EDGE2020

2 answers:

LekaFEV [45]3 years ago

4 0

Answer:

Interest earned= $200

Step-by-step explanation:

Giving the following information:

Initial investment= $20,000

Interest rate= 3%

Inflation rate= 2%

First, we need to calculate the real interest rate. <u>The inflation rate decreases the value of money through time. We need to deduct from the interest rate, the inflation rate.</u>

Real interest rate= 0.03 - 0.02= 0.01

<u>Now, we can calculate the interest earned in year 1:</u>

Interest earned= PV*(1+i)^n - PV

Interest earned= 20,000*(1.01^1) - 20,000

Interest earned= $200

SSSSS [86.1K]3 years ago

4 0

Answer:

200

Step-by-step explanation:

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