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Kellison 9.4 #1 and #2

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  • Kellison 9.4 #1 and #2

    Im having trouble with these two problems in Kellison, any help is appreciated. 9.4 #1 and 2:
    1. The nominal rate of interest is 8% and the rate of inflation is 5%. A single deposit is invested for 10 years. Let:
    A= value of the investment at the end of 10 years meaured in "constant dollars," i.e. in dollars valued at time 0
    B= value of the investment at the end of 10 years computed at the real rate of interest. Find the ratio A/B
    2. Rework Exercise 1 assuming equal level deposits at the beginning of each year during the 10-year period instead of a single deposit.
    (Ans: 1.00 and .82)

    I think my main issue is understand the difference between options A and B. From what I understand, something measured in constant dollars does not include inflation, so it would be calculated using nominal by itself?
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