Josephine is seeking to expand her rare stamp collection. Each year, rare stamps increase in price at a three percent rate. She believes that if she invests her money for one year, she should be able to buy 16 stamps for what 15 stamps would cost today
What is her real interest rate (or reward for waiting)?
A) Her real interest rate is about 4.23%.
B) Her real interest rate is about 5.33%.
C) Her real interest rate is about 6.33%.
D) Her real interest rate is about 6.67%.
Answer: D
Explanation: D) The real interest rate or reward is given by - 1 where FV = 16, PV = 15 and
n = 1. We have: real interest rate or reward = - 1 = 0.0667 or 6.67%.
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