If the nominal rate of interest on a bond was 7 percent,the inflation rate was 6 percent and an individual was in a 50-percent tax bracket,the after-tax real return on the bond would be equal to
A)0 percent.
B).5 percent.
C)6 percent.
D)7 percent.
E)none of the above.

Question

Quizplus · Accepted Answer

The after-tax real return formula can be calculated as follows:
After-tax real return = (1 - Tax rate) x [(1 + Nominal rate) / (1 + Inflation rate)] - 1
= (1 - 0.5) x [(1 + 0.07) / (1 + 0.06)] - 1
= 0.5 x 1.00943 - 1
= 0.004715 or 0.47%
Therefore, the after-tax real return on the bond would be 0.47%, which is closest to option B (0.5%).

If the Nominal Rate of Interest on a Bond Was