Question

Five years ago you invested $18481 at a 5% market interest rate. If the inflation rate is 3%, what is the current constant dollar value of your investment? Enter your answer with 2 decimal places. Do not enter the $ symbol or the comma separator.

Answer 1

Market interest rate = 5%

Inflation rate = 3%

We have to calculate the constant dollar value. This implies inflation adjusted value.

For this we have to calculate the real interest rate.

Real interest rate = Market interest rate - Inflation rate = 5% - 3% = 2%

Calculate the current constant dollar value -

Current constant dollar value = Amount invested * (1 + Real interest rate)^{time period}

Current constant dollar value = $18481 * (1+0.02)⁵ = $18481 * 1.1041 = 20,404.87

Thus,

The current constant dollar value of the investment is $20,404.87