Question

You will receive $100 from a zero-coupon savings bond in 3 years. The nominal interest rate is 8%. a. What is the present value of the proceeds from the bond

Answer 1

a. Present value = Payoff/(1+nominal rate)^t

Present value = $100/1.08^3

Present value = $100/1.259712

Present value = $79.3832241

Present value = $79.38

b. If the inflation rate over the next few years is expected to be 3%, what will the real value of the $100 payoff be in terms of today’s dollars?

= Payoff/(1+inflation rate)^t

= $100/1.03^3

= $100/1.092727

= 91.51416594

= $91.51