Question
Asked Nov 3, 2019

You put money into an account that earns a 8 percent nominal interest rate. The inflation rate is 3 percent, and your marginal tax rate is 25 percent. What is your after-tax real rate of interest?

 

a.

3 percent

 

b.

3.75 percent

 

c.

5 percent

 

d.

6 percent

check_circleExpert Solution
Step 1

The after- tax-real rate of interest is the actual financial benefit from an investment after considering all the effects of taxes and inflation.

Step 2

If the nominal rate of interest is 8%, inflation rate is 3%, marginal tax rate i...

After tax real rate of interest Nominal rate of interestx (1-Tax rate)- Inflation rate
8x(1-25)-3
=8x(.75)-3
= 3
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After tax real rate of interest Nominal rate of interestx (1-Tax rate)- Inflation rate 8x(1-25)-3 =8x(.75)-3 = 3

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