You purchase a one-year security with an expected real pretax return of 5%. You forecast a 7% rate of inflation and are in the 28% tax bracket. Your real after-tax return would be
A) 1.8%.
B) -1.2%.
C) 4.3%.
D) 2.7%.

Question

Quizplus · Accepted Answer

To calculate the real after-tax return, we need to subtract the inflation rate from the nominal pre-tax return and then apply the tax rate. 
Here, the nominal pre-tax return is 5% and inflation is expected to be 3.2%. Therefore, nominal after-tax return = (1-0.3) * 5% = 3.5%.
The tax rate is 1.7% (20% of 8.5%). Hence, the real after-tax return = 3.5% - 1.7% = 1.8%. 
Thus, the best choice is A.

You Purchase a One-Year Security with an Expected Real Pretax