Chapter 4, Problem 8DQ

Pat receives a portion of his income from his holdings of interest-bearing U.S. government bonds. The bonds offer a real interest rate of 2% per year. The nominal interest rate on the bonds adjusts automatically to account for the inflation rate. The government taxes nominal interest income at a rate of 20%. The following table shows two scenarios: a low-inflation scenario and a high-inflation scenario.  Given the real interest rate of 2% per year, find the nominal interest rate on Pat's bonds, the after-tax nominal interest rate, and the after-tax real interest rate under each inflation scenario. Inflation Rate Real Interest Rate Nominal Interest Rate After-Tax Nominal Interest Rate After-Tax Real Interest Rate (Percent) (Percent) (Percent) (Percent) (Percent) 1.0 2.0       7.5 2.0         Compared with lower inflation rates, a higher inflation rate will  (increase/decrease?)  the after-tax real interest rate when the government taxes…

Rico deposited P85,000.00 in a bank account at 7.5% compounded semi-annually for 10 years. If the inflation rate of 7% per year continuous for this period. Will this effectively protect the purchasing power of the original principal?

Suppose that you borrow $5500 for your first year and $6500 for your second year (the maximum amounts for a dependent student), as federal direct student loans at a 4.29% interest rate. Suppose that each loan begins on September 1 of its year, that you finish college in four years, that you do not pay the accruing interest in the meantime, and that you begin repayment on December 1 after graduation. You also borrow $7500 for each of your third and fourth years, again on September 1, all at a 4.29% interest rate. You finish college in four years, and you begin repayment on December 1 after graduation.What is your total debt then, and how much of that is interest?