Question

You currently have $1000 in your savings account. The APR on your savings account is 9%, and the interest is compounded monthly. If the annual inflation rate is 6%, how much your current savings will become in real terms (i.e., in today's dollars) one year from now? Round your answer to the nearest cent; do not use the $ sign (i.e., if the result is $1,234.5678, enter it as 1,234.57).

Answer 1

Current investment = $1000

APR = 9% compounded monthly

So, effective annual rate = (1+APR/n)^n - 1 = (1 + 0.09/12)^12 - 1 = 9.38%

inflation = 6%

So, real rate of return = (1+effective)/(1+inflation) - 1 = 1.0938/1.06 - 1 = 3.189%

So, current savings will become in real terms (i.e., in today's dollars) one year from now = current investment*(1+real rate)

=> current savings will become in real terms (i.e., in today's dollars) one year from now = 1000*1.03189 = $1031.89