You are considering an investment that has a stated nominal return of 28% with a 10% probability of default, in which case you would lose all your money. The inflation rate is
Expected to be 4% and your marginal tax rate is 30%. What is your real, after-tax, post-default
Expected rate of return?

Question

Quizplus · Accepted Answer

The real, after-tax, post-default expected rate of return is 6.38%. This is calculated as follows:Nominal return = 28%Probability of default = 10%Inflation rate = 4%Marginal tax rate = 30%Real return = Nominal return - Inflation rate= 28% - 4%= 24%After-tax return = Real return * (1 - Marginal tax rate)= 24% * (1 - 30%)= 16.8%Post-default expected return = After-tax return * (1 - Probability of default)= 16.8% * (1 - 10%)= 6.38%

You Are Considering an Investment That Has a Stated Nominal