Twenty years ago John invested $7,500 in a mutual fund. The value of his investm

Question

Twenty years ago John invested $7,500 in a mutual fund. The value of his investment declined by 17% during the first year and then declined another 30% during the second year. Eighteen more years have passed, and John's cumulative return over the 20-year period is a 509%. Click the icon to view the interest and annuity table for discrete compounding when-6% per year. a. What is the value of the original investment now? The value of the original investment now is s Round to the nearest dollar.) b. If inflation has averaged 6% per year over the past 20 years, what is the spending power equivalent of the answer to Part a The spending power equivalent in terms of real dollars 20 years ago is $(Round to the nearest dollar) c. What is the real compound interest rate earned over the 20-year period? The real compound interest rate is %. (Round to two decimal places.) d. During the past 18 years, what compound annual rate of return (yield) was earned on John's investment? The compound annual rate of return is 96 (Round to two decimal places ) in terms of real dollars 20 years ago?

Explanation / Answer

(a) The value of the original investment today is

7500 * 509% = 38175$

(b) The spending power of John Before 20 years ago in case inflation is 6%

= 38175 / (1+0.06)20 = 38175*0.3118 = $11903.145

(c) The real compound interest rate over the 2 period is

7500(1+r)20 = 38175

(1+r)20 = 38175/7500 = 5.09 = 8.45% approx

(d) During 18 Years the annual compound return is

Balance before 18 years = 7500 - 17%*7500 = 7500-1275 = 6225 -

6225 - 30%*6225 = 4357.5$

Now the real compound rate of return in 18 years is

7500(1+r)18 = 38175$

(1+r)18 = 5.09 = r = 9.45%

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.