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

Question

Quizplus · Accepted Answer

To find the real after-tax rate of interest, first calculate the nominal interest: ($22,250 - $20,000) / $20,000 = 11.25%. Then, calculate the after-tax nominal interest: 11.25% * (1 - 0.40) = 6.75%. Next, adjust for inflation: (126/120) - 1 = 5%. Finally, calculate the real after-tax rate: ((1 + 6.75%) / (1 + 5%)) - 1 ≈ 1.8%.

Suppose One Year Ago the Price Index Was 120 and Mark