Ernie invested $5,000 in an account for 3 years at 4% interest compounded quarterly Inflation over the period averaged 2% per year.

Question

a. Calculate the value of the investment after 3 years

b. find the real rate of return on the investment and subsequently find the real value of the investment (inflation adjusted) after 3 years

Answer 1

3 years is 12 quarters

a. 5000 [1 + (.04 / 4)]^12 = ?

b. real rate of return is ... {[1 + (.04 / 4)]^4 - 1 - .02} * 100% ... annually

real value is ... 5000 [1 + (real rate of return)]^3