You Have Won a Contest and Will Receive $2,500 a Year

question 3

Multiple Choice

You have won a contest and will receive $2,500 a year in real terms for the next 3 years.Each payment will be received at the end of the period with the first payment occurring one year from today.The relevant nominal discount rate is 6.3 percent and the inflation rate is 3.1 percent.What are your winnings worth today?

• A)$7,057
• B)$7,367
• C)$7,401
• D)$7,500
• E)$7,838

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Definitions:

GIC

Guaranteed Investment Certificate, a type of Canadian investment that offers a guaranteed rate of return over a fixed period.

Maturity Value

The total amount of principal and interest due to be paid at the end of a loan or investment period.

Compounded Semi-annually

Interest that is calculated and added to the principal amount twice a year, leading to interest being earned on interest.

Strip Bond

A type of bond where the coupon payments have been separated from the principal, allowing them to be sold independently as zero-coupon bonds.