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)0.72 percent
D)1.45 percent
E)2.64 percent

Question

Quizplus · Accepted Answer

The correct answer is A.The investor's real after-tax rate of return is calculated as follows:Nominal return = 4%Inflation rate = 3%Real return = Nominal return - Inflation rate = 4% - 3% = 1%Federal tax rate = 28%State and local tax rate = 6%Total tax rate = 28% + 6% = 34%After-tax return = Real return * (1 - Tax rate) = 1% * (1 - 34%) = 0.66%

An Individual Actually Earned a 4 Percent Nominal Return Last