volora Posts: 22, Reputation: 1 New Member #1 Mar 15, 2009, 11:04 AM
Annual rate of inflation
I am using a financial calculator and having problems to find the correct answers, however my answer does not match the book example. Please I want to understand step by step how to do it. I apprecaite your help!

1. If the price of milk has quadrupled (that is, grown four times) over the past 20 years, what has been the annual rate of inflation in milk prices over that time?

2. What is the present value of a perpetuity of \$2750 per year given an interest rate of 8.5 percent p.a. (Assume the first cash flow occurs three years from today).

3. Assume that I deposit \$1250 today into an account that pays 10% p.a. but with quarterly compounding. How much will be in my account exactly 35 years from today?

4. The Smith family just purchased a \$350,000 house with a \$110,000 down payment and a 30-year mortgage loan. The interest rate on the loan is 6.50% p.a. and payments are made monthly. Assuming all required payments are made on time, what will be the remaining balance on the mortgage after 15 years (that is, right after the 180th payment is made)?
 ROLCAM Posts: 1,420, Reputation: 23 Ultra Member #2 Mar 29, 2009, 03:30 AM

Question 1.

If the price of milk has quadrupled (that is, grown four times) over the past 20 years, what has been the annual rate of inflation in milk prices over that time?

For \$1 to become \$4, one needs an inflation
Rate of 7.15% annually over 20 years.(APPROX)

1 1.000000 1.071500
2 1.071500 1.148112
3 1.148112 1.230202
4 1.230202 1.318162
5 1.318162 1.412410
6 1.412410 1.513398
7 1.513398 1.621606
8 1.621606 1.737550
9 1.737550 1.861785
10 1.861785 1.994903
11 1.994903 2.137538
12 2.137538 2.290372
13 2.290372 2.454134
14 2.454134 2.629605
15 2.629605 2.817621
16 2.817621 3.019081
17 3.019081 3.234946
18 3.234946 3.466244
19 3.466244 3.714081
20 3.714081 3.979637

_____________________________________

Try and have a go yourself on the other questions.
Let us see what you can do.

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