Jill has 100 and is tempted to buy 10 tshirts with each one

Jill has $100 and is tempted to buy 10 t-shirts, with each one costing $10. However, she realizes that if she saves the money in a bank account she should be able to buy 11 t-shirts one year later. If the cost of the t-shirt increases by the rate of inflation, i.e. 4%, how much would her nominal and real rates of return have to be?

Please show BAII Plus process

Solution

Per t-shirt cost would be $10.40 after a year because = $10 x (1+inflation) = 10 x (1+4%) = $10.4

Using financial calculator BA II Plus - Input details:

#

FV = Future Value = 11 x $10.40 =

-$114.40

PV = Present Value =

$100.00

N = Total number of periods = Number of years x frequency =

1

PMT = Payment = Payment / frequency =

$0.00

CPT > I/Y = Rate per period or YTM per period = Nominal rate

                   14.40

Convert in annual rate = Rate = Nominal Rate / 100 =

14.40%

Real rate of return = (1+14.40%)/(1+4%)-1 = 10%