Given a nominal interest rate of 6 percent,in which case would you earn the highest after-tax real rate of interest?

Question

Quizplus · Accepted Answer

The after-tax real rate of interest can be calculated by subtracting the inflation rate and the tax rate from the nominal interest rate. Using this formula, we get the following after-tax real rates for each option:

A) 6% - 4% - 25% = -23%
B) 6% - 3% - 20% = -17%
C) 6% - 2% - 15% = -11%
D) Not possible since the after-tax real interest rate will vary based on the inflation and tax rates.

Therefore, option C has the highest after-tax real rate of interest (-11%), even though it is still negative. This means that the purchasing power of your money will decrease even after earning interest due to inflation and taxes.

Given a Nominal Interest Rate of 6 Percent,in Which Case