You are planning to invest $2,500 today for three years at a nominal interest rate of 9 percent with annual compounding.
a. What would be the future value (FV) of your investment?
b. Now assume that inflation is expected to be 3 percent per year over the same three-year period. What would be the investment’s FV in terms of purchasing power?
c. What would be the investment’s FV in terms of purchasing power if inflation occurs at a 9 percent annual rate?