Help needed for Investment problem

M

Murph

New member
Joined
Aug 14, 2015
Messages
3
I have a maths problem for school and I am needing some help solving it.


I have $50000 to invest. I invest it in a bank term deposit for 5 years at 5.2% pa. compounding monthly. I have worked this part out.
I need help in calculating what the value of the investment would be taking into account inflation at 3% per year. I wasn't sure if you just took the 3% off the 5.2% and calculated the total investment at only 2.2% interest rate.


Please help
 
Murph said:
I have $50000 to invest. I invest it in a bank term deposit for 5 years at 5.2% pa. compounding monthly. I have worked this part out.

I need help in calculating what the value of the investment would be taking into account inflation at 3% per year.
Click to expand...
The dollar value will be the value you computed in the first part. Are you saying that you want to determine the constant-dollar value, so you can compare in terms of today's dollar value, assuming a certain future rate of interest?

Thank you! ;)
 
Murph said:
I have a maths problem for school and I am needing some help solving it.


I have $50000 to invest. I invest it in a bank term deposit for 5 years at 5.2% pa. compounding monthly. I have worked this part out.
I need help in calculating what the value of the investment would be taking into account inflation at 3% per year. I wasn't sure if you just took the 3% off the 5.2% and calculated the total investment at only 2.2% interest rate.


Please help
Click to expand...

Subtracting the inflation rate from the interest rate is the easiest way to do it and, although it is close for small inflation rates and rates of interest, it is not quite correct. That is because, for small x
\(\displaystyle \frac{1}{1+x}\) ~ \(\displaystyle 1\, -\, x\)
so that a simple subtraction is about correct.


As an example, suppose we invest a current $100 at 10% pa for one year. We would have $110. However, if the inflation rate were 5%, then the current 'buying power' of our $110 compared to a year ago would be $110/1.05 = $104.76 which is pretty close to the $105 we would have obtained if we had just subtracted the two rates.
 
Thank you

Thank you for your help. It has pointed me in the right direction.

Does the same apply for the appreciation rate of collectables?
 
You must log in or register to reply here.
Top