Question

You are trying to estimate the real interest rate for the mining industry products and proceed as follows. You consider buying coal and gold in equal proportion, spending $1000 on coal, and another $1000 on gold in today's dollars. In 5 years from now, the selling values in actual dollars are predicted to be $1286 (coal) and $1229 (gold). Inflation (for coal) is 1.6% per year, for the next 5 years. For gold, the gold price index is predicted to rise in the next 5 years from the current 411 points to 429 points. Compute the estimated real interest rate, as a number, with 0.001 precision. Hint: Calculate real interest rate for the cash flow: 1) invest now $1000+$1000; 2) sell in 8 years coal and gold and obtain appropriate cash flow.

          You are trying to estimate the real interest rate for the mining
industry products and proceed as follows. You consider buying coal
and gold in equal proportion, spending $1000 on coal, and another
$1000 on gold in today's dollars. In 5 years from now, the selling
values in actual dollars are predicted to be $1286 (coal) and $1229
(gold). Inflation (for coal) is 1.6% per year, for the next 5
years. For gold, the gold price index is predicted to rise in the
next 5 years from the current 411 points to 429 points. Compute the
estimated real interest rate, as a number, with 0.001 precision.
Hint: Calculate real interest rate for the cash flow: 1) invest now
$1000+$1000; 2) sell in 8 years coal and gold and obtain
appropriate cash flow.

Added by Justin O.

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