1.Money is invested in a savings account with an annual effective rate of interest of 6% for two years.
The annual rate of inflation is 3.2% compounded monthly for the first year and 4.8% compounded monthly
for the second year. Calculated the "real" annual effective rate of interest earned over the two years.
1
i
real
2
1.06
2
1
.032
12
12
1
.048
12
12
i
real
1.06
2
1
.032
12
12
1
.048
12
12
1
2
−
1
1.8507251%
2. Let
i
2
denote the annual nominal rate of interest compounded semiannually and let
r
2
denote the
annual nominal rate of inflation compounded semiannually. Derive an expression for the "real" annual
nominal rate of interest compounded semiannually. Hint: first find the "real" accumulation function.
a
r
t
a
t
p
t
1
i
2
2
2
t
1
r
2
2
2
t
1
i
2
2
1
r
2
2
2
t
i
real
2
2
a
r
t
1
2
−
a
r
t
a
r
t
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This note was uploaded on 03/30/2012 for the course ACTSC 231 taught by Professor Chisholm during the Spring '09 term at Waterloo.
 Spring '09
 Chisholm

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