I understand the formula to work out the effect of inflation on the interest rate.

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2.  Calculate the amount of interest that Kate would receive if she invests it all in the three-year term.

Kate would receive interest of $36,186 if the interest is compounded each year.  If it is not then each year she would receive $11,400 or a total of $34,200.

3.  Calculate the present value of the interest and return of the principal in three years’ time if the inflation rate is 3 per cent p.a.

Assuming the investment is compounded then the PV of the FV $236,186 = $205,055.

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