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 the approximate nominal rate necessary to compensate for waiting and to cover inflation?

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23-05-2017
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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 the approximate nominal rate necessary to compensate for waiting and to cover inflation?

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BlueSky06 BlueSky06 · Answer 1 · 2017-06-05T12:34:32+02:00

I think the answer is 7.00%. Base on my research, to get the nominal rate you need to have the real rate and inflation. So in this problem, the given are the following: the inflation rate is 3.00%; the real rate is given by -1 where FV = 26, PV = 25 and n = 1. The real rate -1 = 0.04 or 4.00%.
Formula Nominal rate= real rate + inflation
= 4.00% + 3.00%
= 7.00%
7.00% is which the rate needed to compensate for her to wait and to cover inflation