If the nominal interest rate is 8% and the inflation rate is 5%. Using the relevant real interest rate formula, what is the future value of an $1500 investment in one year?
Question
If the nominal interest rate is 8% and the inflation rate is 5%. Using the relevant real interest rate formula, what is the future value of an $1500 investment in one year?
Solution
The real interest rate can be calculated using the Fisher equation, which is:
Real Interest Rate = [(1 + Nominal Interest Rate) / (1 + Inflation Rate)] - 1
First, let's calculate the real interest rate:
Real Interest Rate = [(1 + 0.08) / (1 + 0.05)] - 1 = 0.02857 or 2.857%
The future value of an investment can be calculated using the formula:
Future Value = Present Value * (1 + Real Interest Rate)
Now, let's calculate the future value of the $1500 investment in one year:
Future Value = 1542.85
So, the future value of a 1542.85.
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