Question

An investor purchases a bond worth IDR 100 million, with interest tax on the bond by 15%. The investor is faced with two different cases.

Case 1: Annual inflation = 0.5%, nominal interest rate = 3.17% / year

Case 2: Annual inflation = 2.96%, nominal interest rate = 5.63% / year

a. In which cases do the investors receive the highest real returns? Explain. (5 points)

b. In which case did the investor pay the highest taxes? Explain. (5 points)

c. If you can choose, which case is the best for investors to buy bond? Explain. (5 points)

Answer 1

As per the question it is given that

The investor purchased a bond with IDR 100 milloin

Interest tax on the bond by 15%

And the investor faced with two different conditions

1.Annual inflation =0.5%,nominal interest rate=3.17%/Year

2.Annual Inflation=2.96%,Nominal interest rate=5.63%/Year

Real Interest rate

case 1

Nominal interest rate-inflation

3.17-0.5=+2.67

Case 2

5.63-2.96=+2.67

a.It seems that actual interset rate is same

By considering interest rate and inflation investor can choose case one because annual inflation rate and nominal interest rate which is compared to second case it seems quit reasonable

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