Given a nominal interest rate of 8 percent, in which of the following cases would you earn the highest after-tax real rate of interest?

Question

Quizplus · Accepted Answer

To find the after-tax real rate of interest, we need to subtract inflation and taxes from the nominal interest rate. 
For option A: 
After-tax rate = nominal rate * (1 - tax rate) = 8% * (1-0.25) = 6%
After-tax real rate = after-tax rate - inflation = 6% - 3% = 3%
For option B: 
After-tax rate = nominal rate * (1 - tax rate) = 8% * (1-0.50) = 4%
After-tax real rate = after-tax rate - inflation = 4% - 2% = 2%
For option C: 
After-tax rate = nominal rate * (1 - tax rate) = 8% * (1-0.75) = 2%
After-tax real rate = after-tax rate - inflation = 2% - 1% = 1%
Therefore, option A gives the highest after-tax real rate of interest.

Given a Nominal Interest Rate of 8 Percent, in Which