Suppose You Have $1,000, Which You Can Put in Two

question 88

Essay

Suppose you have $1,000, which you can put in two different types of accounts at a bank. One account pays interest of 9 percent per year; the other pays an interest rate of 3 percent per year plus the rate of inflation. Calculate the amount of money you will have at the end of one year if the inflation rate is 5 percent. What is the real rate of return in each case? Which account would you prefer if you expected inflation to be 8 percent?

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Definitions:

Factoring

Factoring is a financial transaction where a business sells its accounts receivable to a third party, called a factor, at a discount.

Pledging

Offering an asset as security or collateral for a debt obligation.

Assigning

The process of allocating or appointing a particular task, responsibility, or resource to a specific entity or individual.

Cash Inflows

Money or equivalent value received by an entity, typically as a result of its business operations, investments, or financing activities.