Question

Question #5

John works at a financial institution in the United States and his job profile makes him interact with the various components of the nation’s financial system. He is of the view that a nation’s citizenry is better-off when everyone is self-sufficient and no one needs to borrow from or lend to someone to succeed in their respective ventures. In fact, he comes from a family background that considers borrowing to be an embarrassment. To be debt-free is what he sees as an important pillar of financial success.

John’s younger brother calls in just before lunch. He is really excited about a new smartphone that he wants to buy and show it off to his friends at the University. He has been saving for some time and has accumulated $300. His grandfather has also contributed $550 in the kitty. He is asking John for some help as the new phone costs $900. But you know our friend John – He is sceptical as usual and tells his brother, “You know that the value of smartphones falls with time. Trust me, by the same time next year, the phone will be 5% cheaper. You would have seen its customer reviews as well.” By the way, the name of John’s brother is Shaun and he boasts a special combination, which is that of vigorous youth combined with a calm head on his shoulders. He takes his big brother’s advice seriously and decides to deposit his savings along with what his grandfather’s contribution in a 1-year deposit account which offers a real interest rate of 0.15% p.a. The expected inflation rate is 0.8% p.a. He hopes to be able to afford the phone when the deposit matures. Thanking John for his sensible advice, he disconnects the call, leaving John to proceed for lunch.

Question 5
Will Shaun be able to buy his desired smartphone next year? Support your answer with relevant computations.

Answer 1

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I hope my efforts will be fruitful to you....?