Answer:
a. Present value = Payoff/(1+nominal rate)^t
Present value = $100/1.08^3
Present value = $100/1.259712
Present value = $79.3832241
Present value = $79.38
b. If the inflation rate over the next few years is expected to be 3%, what will the real value of the $100 payoff be in terms of today’s dollars?
= Payoff/(1+inflation rate)^t
= $100/1.03^3
= $100/1.092727
= 91.51416594
= $91.51
