Finance Questions

Tagged: inflation rate, Interest rate, Yield curve

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June 17, 2017 at 5:24 am #16019

amandeep kathuria
Member

The inflation rate is 1.5% per year. The real rate of return is 2.0% per year. A perpetuity project that paid $100 this year will provide income that grows by the inflation rate. Show what this project is truly worth. Do this in both nominal and real terms. (Be clear on what never to do.)

June 17, 2017 at 5:31 am #16020

admin
Keymaster

Solution
The nominal interest rate is 0.99 * 1.03 – 1 ≈ 1.97%.
Therefore, the cash flow is worth about
= $1000000/1.0197 ≈ $980,681.
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