You are trying to estimate the real interest rate for the mining industry produc

Question

You are trying to estimate the real interest rate for the mining industry products and proceed as follows. You consider buying coal and gold in equal proportion of today's dollars, spending $1000 on coal, and another $1000 on gold. In 3 years from now, the selling values in actual dollars are predicted to be $1213 (coal) and $1291 (gold).

Inflation (for coal) is 1.7% per year, for the next 3 years. For gold, the gold price index is predicted to rise in the next 3 years from the current 412 points to 434 points.

Compute the estimated real interest rate, as a number, with 0.001 precision.

Explanation / Answer

Nominal Rate of Return Coal =(1213 -1000)/1000 = 21.3%
Real rate of return = Nominal - Inflation = 21.3% - 1.7% = 19.6%

Nominal Rate of return Gold = ($1291 - $1000)/$1000 = 29.1%
Points increase = (434 - 412 )/412 = 5.34%
Real rate of return = Nominal - Inflation = 29.1% - 5.34% = 23.76%
Real rate of Return = Nominal - inflation = 29.1% -

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