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Ernie invested $5,000 in an account for 3 years at 4% interest compounded quarterly Inflation over the period averaged 2% per year.

a. Calculate the value of the investment after 3 years

b. find the real rate of return on the investment and subsequently find the real value of the investment (inflation adjusted) after 3 years

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I'm so confused

  1. 3 years is 12 quarters

    a. 5000 [1 + (.04 / 4)]^12 = ?

    b. real rate of return is ... {[1 + (.04 / 4)]^4 - 1 - .02} * 100% ... annually

    real value is ... 5000 [1 + (real rate of return)]^3

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    R_scott

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