Question

Josephine is seeking to expand her rare stamp collection. Each year, rare stamps increase in price at a three percent rate. She believes that if she invests her money for one year, she should be able to buy 16 stamps for what 15 stamps would cost today. What is her real interest rate (or reward for waiting)

Answer 1

Answer:

9.67%

Explanation:

The inflation rate is 3.00%.

The real interest rate or reward is given by - 1  where

FV = 16, PV = 15 and n = 1.

real interest rate or reward = - 1 = 0.0667 or 6.67%.

Nominal rate = real rate + inflation = 3.00% + 6.67% = 9.67%,

this is the rate necessary to compensate her for waiting and cover inflation.

Answer 2

Answer: 9.67%

Explanation:

Given detail

The inflation rate is 3.00%.

The real interest rate or reward is given -1

where FV = 16, PV = 15 and n = 1. We have: real interest rate or reward = - 1 = 0.0667 or 6.67%. Nominal rate = real rate + inflation

= 3.00% + 6.67% = 9.67%