Mary bought a bond a debt security for $2,500 with a nominal interest rate of 5 percent.If the inflation rate is 4 percent and Mary must pay 30 percent of her income in taxes, her after-tax nominal interest income is .
A)$87.50
B)$22.50
C)$37.50
D)$48.50

Question

Mary bought a bond ​a debt security for $2,500 with a nominal interest rate of 5 percent.If the inflation rate is 4 percent and Mary must pay 30 percent of her income in taxes, her after-tax nominal interest income is .
A)​$87.50
B)​$22.50
C)​$37.50
D)​$48.50

Quizplus · Accepted Answer

The after-tax nominal interest income is $87.50. The nominal interest rate is 5 percent, so the annual interest income is $2,500 * 0.05 = $125. The inflation rate is 4 percent, so the real interest rate is 5 percent - 4 percent = 1 percent. The after-tax nominal interest income is $125 * (1 - 0.30) = $87.50.

Mary Bought a Bond ​A Debt Security for $2,500 with a Nominal

Mary Bought a Bond A Debt Security for $2,500 with a Nominal