Question

You are trying to estimate the real interest rate for the mining industry products and proceed as follows. You consider buying coal and gold in equal proportion, spending $1000 on coal, and another $1000 on gold in today's dollars. In 8 years from now, the selling values in actual dollars are predicted to be $1,203 (coal) and $1,273 (gold).

Inflation (for coal) is 1.8% per year, for the next 8 years. For gold, the gold price index is predicted to rise in the next 8 years from the current 410 points to 429 points.

Compute the estimated real interest rate, as a number, with 0.001 precision.

Hint: Calculate real interest rate for the cash flow: 1) invest now $1000+$1000; 2) sell in 8 years coal and gold and obtain appropriate cash flow.​

Answer 1

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