Final answer:
The question deals with the purchase of bonds in relation to changing interest rates and also discusses the long-term benefits of compound interest. It highlights the impact of inflation on purchasing power and the nominal interest rate, as well as the implications for taxation on investment gains.
Step-by-step explanation:
The subject in question involves the concept of bonds, specifically related to interest rates and purchasing power within the field of finance and investment, making this a Business related topic. Given the complexity and the nature of the financial calculations, this would be most suitable for a College level student.
When considering the purchase of a bond one year before its maturity, the current market interest rate must be taken into account. If a bond was issued at a 6% interest rate and the current interest rate is 9%, the bond's price will likely decrease to reflect the new yield expectations. This situation requires understanding how interest rates affect bond prices.
The power of compound interest and its impact on savings is evident when considering long-term investments. Starting early, as in the example of saving $3,000 at age 25, can dramatically increase the future value of an investment, especially when the interest rate is above inflation. However, the nominal interest rate may not always reflect actual purchasing power due to inflation and tax implications. For instance, even if you receive a 5% nominal interest, inflation can erode your real interest rate, leading to a decrease in purchasing power and potential issues with taxes on the nominal gains.