Question

1. You bought a 1‐year $10,000 Treasury bill for $9,090 and held it until maturity. The inflation was 5%.
   1. What was your real rate of return?
   2. If interest income is subject to 12% income tax, what will be your real rate of return after taxes?

Answer 1

a)   

(1+0.1001)/(1+0.05) - 1 = (1.1001/1.05) - 1 = 0.0477 or 4.77%

Nominal Rate =[( Par Value - Original Investment value) / Original Investment value] x 100

= [(10,000-9090)/9090] x 100 = (910/9090) x 100 = 10.01% or 0.1001

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b)

= (1+0.0880) / (1+0.05) - 1 = (1.088/1.05) - 1 = 0.0362 or 3.62%

Here Nominal rate = 0.1001 x (1- 0.12) = 0.0880 or 8.80%