The real rate of return on a tax-free investment yielding 7 percent annually would be ____ percent if the investor were in the 35 percent marginal tax bracket and inflation were 4 percent.
A) -0.55 percent
B) ?0.55 percent
C) ?3.00 percent
D) ?4.48 percent

Question

Quizplus · Accepted Answer

To calculate the real rate of return, we need to subtract the inflation rate from the nominal rate of return and then adjust for taxes. 
Real rate of return = (1 + nominal rate) / (1 + inflation rate) - 1
= (1 + 0.07) / (1 + 0.04) - 1
= 0.0272 or 2.72%
Next, we need to adjust for taxes by multiplying the real rate of return by (1 - marginal tax rate).
Adjusted real rate of return = 0.0272 x (1 - 0.35)
= 0.01768 or 1.768%
Therefore, the real rate of return on a tax-free investment yielding 7 percent annually would be 1.768% if the investor were in the 35 percent marginal tax bracket and inflation were 4 percent. Option B is the closest to this value.

The Real Rate of Return on a Tax-Free Investment Yielding