pablo recently lent $5,000 to his friend kristine to open a bakery. she promised to pay him back with…
pablo recently lent $5,000 to his friend kristine to open a bakery. she promised to pay him back with interest within one year. pablo and kristine agreed on a nominal interest rate of 5.5 percent. if the annual rate of inflation is 0.5 percent, what kind of profit can pablo expect to receive for his investment? how much interest will pablo receive from his investment? $200 due to a real interest rate of 4 percent $250 due to a real interest rate of 5 percent $300 due to a real interest rate of 6 percent $350 due to a real interest rate of 7 percent
Answer
Explanation:
Step1: Calculate real - interest rate
The Fisher equation is $r = i-\pi$, where $r$ is the real - interest rate, $i$ is the nominal interest rate, and $\pi$ is the inflation rate. Given $i = 5.5%=0.055$ and $\pi=0.5% = 0.005$. Then $r=0.055 - 0.005=0.05$ or 5 percent.
Step2: Calculate interest amount
The simple - interest formula is $I = Prt$, where $P$ is the principal amount, $r$ is the interest rate, and $t$ is the time in years. Here, $P = 5000$, $r = 0.05$, and $t = 1$. So $I=5000\times0.05\times1 = 250$.
Answer:
$250$ due to a real interest rate of 5 percent