The Federal Reserve's Zero Interest Rate Policy

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One of the negative externalities of the Federal Reserve's zero interest rate policy to stimulate lending and borrowing has been the effect on savers and investors throughout the economic landscape. Historically low rates on CD's, bonds, and treasuries have forced investors to take on more risk in order to meet their required return on investment. Amidst this backdrop Granny Smith has a difficult task ahead of her in saving for her grandchild's college education. Financially savvy, Granny Smith has scoured the internet and found a five year CD at Ally Bank paying 1.72 percent (Bank Rate.com. 2012. PP. 1). She is reluctant to tie up her money for longer than five years given that the stated rate is actually below inflation, which in effect provides her a negative real rate of return. However, she cannot take the risk of losing her $25,000 capital in the stock market, so even if this return over the next five years is the best she can get, that will at least ensure she will have not lost principal. The future value equation is written as: Future Value= Present Value (1+ interest rate) ^years. The year value is written as an exponent. In this case, Granny wants to invest her $25,000 for 18 years at the 1.72 rate five year CD rate. For the purposes of this exercise, the grandchild will start school in eighteen years, but the assumption will be that the 1.72 rate is constant over that period. $25,000 if invested for 18 years at a 1.72% interest rate. The stated rate of
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