Given a nominal interest rate of 6 percent,in which of the following cases would you earn the lowest after-tax real rate of interest?
A)Inflation is 4 percent;the tax rate is 5 percent.
B)Inflation is 3 percent;the tax rate is 20 percent.
C)Inflation is 2 percent;the tax rate is 30 percent.
D)The after-tax real interest rate is the same for all of the above.

Question

Quizplus · Accepted Answer

To calculate the after-tax real rate of interest, we need to subtract the inflation rate and the tax rate from the nominal interest rate. The formula is:

After-tax real rate of interest = Nominal interest rate - Inflation rate - Tax rate

For option A:

After-tax real rate of interest = 6% - 4% - 5% = -3%

This means that the after-tax real rate of interest is actually negative, which means that you would be losing money by investing in this scenario.

For options B and C, the after-tax real rate of interest is positive:

For option B:

After-tax real rate of interest = 6% - 3% - 20% = -17%

For option C:

After-tax real rate of interest = 6% - 2% - 30% = -26%

Therefore, option A is the only choice where you would earn the lowest after-tax real rate of interest.

Given a Nominal Interest Rate of 6 Percent,in Which of the Following