Question

Fill out the table below assuming a 25% (1/4) tax rate. To answer this question, only submit the answer for one of the rows.

Nominal Interest Rate	Inflation	Real Return After Taxes
4%	4%
8%	4%
12%	4%
16%	4%

Note: Please use whole numbers for the percent, but do not include the % sign. It will be marked incorrect otherwise.

Answer 1

It shall be noted that Real Return After Taxes is given by:

Real Return After Taxes = ((1 + Nominal Interest rate * (1 - tax rate)) / (1 + inflation)) - 1)*100

Consider Nominal Interest rate = 4%

Inflation rate = 4%

Tax rate = 25%

Thus, After-tax Nominal Return = 4%*(1-tax rate)

=4%*(1-25%)

=3%

After-tax real return = (((1+After tax Nominal Return) / (1 + Inflation rate)) - 1)*100

=(((1 + 3%)/ (1+4%)) - 1)*100

= - 0.96

= - 1 (whole numbers for the percent and not including the % sign)

Thus, the complete table is:

Nominal Interest Rate	Inflation	Real Return After Taxes (whole numbers for the percent and not including the % sign)
4%	4%	-1
8%	4%	2
12%	4%	5
16%	4%	8