John Cleaver’s grandfather died recently and left him a trunk that had been locked in his attic for years. At the bottom of the trunk John found a packet of 50 World War I “liberty bonds” that had never been cashed in. The bonds were purchased for $11.50 each in 1918 and pay 3% interest as long as they’re held. (Government savings bonds like these accumulate and compound their interest, unlike corporate bonds which regularly pay out interest to bond holders.)
a. How much were the bonds worth in 2007?
b. How much would they have been worth if they paid interest at a rate more like that paid during the 1970s and 80s, say 7%?
c. Comment on the difference between the answers to parts (a) and (b).