Question

$ 1000 worth of bonds were buried in the backyard in 1934. Average inflation was 4.5% From 1934 to 2004. What was the relative purchasing power of these bonds? If $ 1000 was invested in stock market in 1934, how much it will worth in 2004 given that the stock market increased an average of 15%?

Answer 1

1. relative purchase power = historical worth * 1 /(1+r)^n

r = 4.5% inflation

n=1934 to 2004 years =>70 years

=>$1000*1/(1.15)^70

=>$1000* 0.04590497

=>$45.90497.

=>$45.90.

2.worth in 2004 = amount invested *(1+r)^n

here,

r=15% =>0.15

=>$1000*(1.15)^70

=>$1000*17,735.72

=>$17,735,720.