An individual actually earned a 4 percent nominal return last year. Prices went up by 3 percent over the year. Given that the investment income was subject to a federal tax rate of 28 percent and a state and local tax rate of 6 percent,what was the investor's actual real after-tax rate of return?
A)-0.36 percent
B)0.66 percent
C)2.64 percent
D)0.72 percent
E)1.45 percent

Question

Quizplus · Accepted Answer

The real after-tax rate of return is the nominal return minus the inflation rate and the taxes on the return. In this case, the nominal return is 4%, the inflation rate is 3%, and the taxes are 28% federal and 6% state and local, for a total of 34%. So the real after-tax rate of return is 4% - 3% - 34% * (4% - 3%) = 0.36%.

An Individual Actually Earned a 4 Percent Nominal Return Last