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You need to earn 6% annul real rate of return and, in addition, you need to keep up with the annual inflation rate. Exactly 4 years ago, the expected inflation rate was 2% per year. At that time, you decided to invest in a 7-year annuity with $20,000 deposited at the end of each year. Now, right after you made the 4th deposit, the expected annual inflation rate for the next 3 years is 3% per year. To keep your investment goal of 6% real annual return and keeping up with the new inflation rate, how much more each year for the last 3 years you will need to deposit in addition to the $20,000 per year to reach that goal?

Respuesta :

Cricetus

Answer:

"4,000" is the appropriate option.

Explanation:

Given:

Real interest rate,

= 6%

Inflation rate,

= 2%

Annual deposit,

= $20,000

Now,

The nominal interest rate will be:

= [tex]Real \ interest \ rate+Inflation \ rate[/tex]

= [tex]6+2[/tex]

= [tex]8[/tex] (%)

As per the annual deposit, I was making,

= [tex]20000\times 0.6[/tex]

= [tex]1200 \ every \ year[/tex]

Inflation rate rise 3% i.e.,

= [tex]2+3[/tex]

= [tex]5[/tex] (%)

Just to earn 1200, I have to:

= [tex]\frac{1200}{0.05}[/tex]

= [tex]24,000[/tex]

Thus the above is the appropriate answer.

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