Question

Assume you are saving $1,000 by depositing into a bank CD account with one year until maturity. The interest rate on your deposit is 10% and inflation is expected to be 4% over the next year
a. How much money will you have in your bank account at the end of one year?

b. What is the real interest rate you expect to earn on your deposit over the next year?

c. If you are saving for a gaming computer that currently sells for $1,090, will you have enough money from the savings to buy it next year?

Answer 1

The amount of money that I would have in the bank account at the end of one year is $1,100.

The real interest rate I would expect to earn on the deposit is 6%.

If I am saving for a gaming computer, at the end of next year I would have enough money.

What is the value of the money by next year?

The formula that can be used to determine the money in my bank account next year is:

FV = P (1 + r)^n

Where:

FV = Future value

P = Present value

R = interest rate

N = number of years

1000 x (1.1)^1 = $1,100

What is the real interest rate?

The real interest rate is the nominal interest rate less inflation rate.

The real interest rate = 10% - 4% = 6%

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