Question

Tax bracket: 20%, nominal return: 10%, Inflation rate: 6%

a.before-tax real rate?

b.after-tax real return?

c.after-tax nominal return?

d.after-tax real interest rate?

e.??=????????? ???? × ??? ???????it=inflation rate × tax bracket?

f.????? ??? ???? ??????− ????? ??? ???? ???????? ????−??after tax real return- after tax real interest rate-it?

Answer 1

Tax bracket = 20%

Nominal return = 10%

Inflation rate = 6%

(a)

Before tax real rate = (1+Nominal rate)/(1+Inflation)-1

= (1.1/1.06)-1

= 3.77%

(b)

After tax real return = (1+ After tax Nominal return)/(1+Inflation)-1

After tax Nominal return = 0.10*(1-0.20)

= 0.08 i.e. 8%

After tax real return = (1.08/1.06)-1

= 1.89%

(c)

After tax Nominal return = Nominal return*(1-tax)

= 0.10*(1-0.20)

= 0.08 i.e. 8%

(d)

After tax real interest rate = After tax Nominal interest rate – inflation

= 8%-6%

= 2%