question 19 Discount loan Amortized loan Compound loan -Question 19 Elizabeth is

Question

question 19

Discount loan Amortized loan Compound loan -Question 19 Elizabeth is seeking to expand her rare coin collection. Each year, rare coins increase in price at a three percent rate. She believes that if she invests her money for one year she should be able to buy 26 coins for what 25 coins would cost today. What is her real interest rate or reward for waiting? 4.00% 2.00% 1.00% 3.00% Question 20 are Nominal interest rates are the sum of two major components. These components the real interest rate and expected inflation the risk-free rate and expected inflation

Explanation / Answer

Let price of 1 coin now be P
Let price of 25 coins now =25*P

Price of 1 coin 1 year later=P*(1+3%)=1.03P
Price of 26 coins 1 year later=26*P*(1+3%)=26*1.03P

Invest 25P and get 26*1.03P 1 year later
nominal return=26.78/25-1=7.12%
real return=(1+nominal return)/(1+inflation)-1=1.0712/1.03-1=4%

Option A

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