If the actual inflation was 4 percent over the past year and you owned a one-year bond that paid 4 percent interest, what was your after-tax realized real interest rate if your tax rate was 15 percent?
A)−0.6 percent
B)0.0 percent
C)1.1 percent
D)2.0 percent

Question

Quizplus · Accepted Answer

The after-tax return on the bond is 4% * (1 - 0.15) = 3.4%. Since inflation was 4%, the real interest rate, adjusting for inflation, is 3.4% - 4% = -0.6%.

If the Actual Inflation Was 4 Percent Over the Past