Suppose I put 2400 in a bond that yields 4 interest one year

Suppose I put $2400 in a bond that yields 4% interest one year from today.Inflation is 5.5% anually. What is the change in my purchasing power from today to one year from today? a. Increased by $36 b. Increased by $34 c. Decreased by $36 d. Decreased by $34

Solution

Ans: On investing $2400 in a bond for 1 year at 4%, the amount received at the end of the year= 2400(1+0.04)= $2496

Worth of $2496 then = 2496 / (1+0.055)= $2366

Thus, his purchasing power has decreased by 2400-2366 = $34

Ans d)