Suppose one year ago the price index was 120 and Maria purchased $20,000 worth of bonds.One year later the price index is 126.Maria redeems her bonds for $22,700 and is in a 40 percent tax bracket.What is Maria's real after-tax rate of interest to the nearest tenth of a percent?
A)5.1 percent
B)3.1 percent
C)2.1 percent
D)2.4 percent

Question

Quizplus · Accepted Answer

First, we need to calculate the inflation rate for the year using the price index:

Inflation rate = (126-120)/120 = 0.05 or 5%

Next, we need to calculate the before-tax rate of return on Maria's bonds:

Before-tax rate of return = ($22,700/$20,000) - 1 = 0.135 or 13.5%

Now we can calculate Maria's taxable income from the bond investment:

Taxable income = (0.4) x (0.135) x ($20,000) = $1,080

Finally, we can calculate Maria's after-tax rate of return:

After-tax rate of return = (1 - 0.4) x (0.135 - 0.05) = 0.051 or 5.1%

Therefore, the answer is B (5.1 percent).

Suppose One Year Ago the Price Index Was 120 and Maria