The nominal interest rate is 4%,the inflation rate is 1% and the tax rate is 20%.Given U.S.tax laws,how is after-tax real return computed?
A).03(1-.20)
B).04(1 -.20)
C).04(1 - .20)- .01
D)None of the above is correct.

Question

Quizplus · Accepted Answer

After-tax real return is calculated by subtracting the inflation rate and taxes from the nominal interest rate. Thus, the equation would be:
After-tax real return = Nominal interest rate x (1 - tax rate) - inflation rate
Plugging in the numbers, we get:
After-tax real return = 0.04 x (1 - 0.20) - 0.01
After simplifying, we get:
After-tax real return = 0.028 or 2.8%

The Nominal Interest Rate Is 4%,the Inflation Rate Is 1