CalloftheBlade

November 27th 2005, 01:50 PM

Im having trouble with these two problems in Kellison, any help is appreciated. 9.4 #1 and 2:

1. The nominal rate of interest is 8% and the rate of inflation is 5%. A single deposit is invested for 10 years. Let:

A= value of the investment at the end of 10 years meaured in "constant dollars," i.e. in dollars valued at time 0

B= value of the investment at the end of 10 years computed at the real rate of interest. Find the ratio A/B

2. Rework Exercise 1 assuming equal level deposits at the beginning of each year during the 10-year period instead of a single deposit.

(Ans: 1.00 and .82)

I think my main issue is understand the difference between options A and B. From what I understand, something measured in constant dollars does not include inflation, so it would be calculated using nominal by itself?

1. The nominal rate of interest is 8% and the rate of inflation is 5%. A single deposit is invested for 10 years. Let:

A= value of the investment at the end of 10 years meaured in "constant dollars," i.e. in dollars valued at time 0

B= value of the investment at the end of 10 years computed at the real rate of interest. Find the ratio A/B

2. Rework Exercise 1 assuming equal level deposits at the beginning of each year during the 10-year period instead of a single deposit.

(Ans: 1.00 and .82)

I think my main issue is understand the difference between options A and B. From what I understand, something measured in constant dollars does not include inflation, so it would be calculated using nominal by itself?