Question

You would like to have the current equivalent in terms of today's buying power of $2,500 in 10 years. How much would you have to invest today (in nominal terms) to fund this level of real consumption?
You expect inflation to be 5% per year over that time period. Your investments earn 7% per year in nominal terms.

$2,500

$1,271

$2,112

$2,070

Answer 1

Calculate real rate of return as follows:

Real rate of return = ((1+ Nominal rate) / (1+ inflation rate))-1

= ((1+7%) / (1+5%))-1

= 1.904762

Therefore, the real rate of return is 1.904762%.

--------------------------------------------------------------------------------

Calculate the today's value as follows:

Therefore, the today's value is $2070.