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

Answer 1

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. The inflation rate decreases the value of money through time. We need to deduct from the interest rate, the inflation rate.

Real interest rate= 0.03 - 0.02= 0.01

Now, we can calculate the interest earned in year 1:

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

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

Interest earned= $200

Answer 2

Answer:

200

Step-by-step explanation: