If your after-tax realized real interest rate was 1 percent over the past year and the inflation rate was 3 percent, what was the nominal interest rate on your one-year bond if your tax rate was 15 percent?
A)4.45 percent
B)4.7 percent
C)5.0 percent
D)5.25 percent

Question

Quizplus · Accepted Answer

Let R be the nominal interest rate.
(1+R)*(1-0.15) = (1+1%)*(1+3%)
0.85(1+R) = 1.04
1+R = 1.04/0.85
1+R = 1.2235
R = 0.2235 = 22.35%
The nominal interest rate is 4.7%.

If Your After-Tax Realized Real Interest Rate Was 1 Percent