Suppose one year ago the price index was 120 and Maria purchased $20,000 worth of bonds. One year later the price index is 126. Maria redeems his bonds for $22,250 and is in a 40 percent tax bracket. What is Maria's real after-tax rate of interest to the nearest tenth of a percent?

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Quizplus · Accepted Answer

Maria's nominal gain is $2,250. After 40% tax, the gain is $1,350. The real gain is adjusted for inflation: (126/120) = 1.05, so $20,000 * 1.05 = $21,000. Real gain is $1,250 ($22,250 - $21,000). Real after-tax gain is $1,350 - $1,250 = $100. Real after-tax rate = ($100/$20,000) * 100 = 0.5%.

Suppose One Year Ago the Price Index Was 120 and Maria