Question

If the tax rate is 40 percent, compute the before-tax real interest rate and the after-tax real interest rate.

(answer in percentages. If whole percentages, do not need decimals. If have decimals, round to nearest hundredth of percent)

Show all steps clearly

assume multiplying percentages by $100

before-tax real interest rate = nominal interest rate - inflation rate

reduction in nominal interest = nominal interest rate multiplied by tax rate

after-tax nominal interest rate = nominal interest rate - reduction in nominal interest

after-tax real interest rate = after-tax nominal - inflation rate

a. The nominal interest rate is 10 percent and the inflation rate is five percent.

Find:

nominal interest rate

before-tax real interest rate

reduction in nominal interest rate

after-tax nominal interest rate

after-tax real interest rate

b. The nominal interest rate is six percent and the inflation rate is two percent.

Find:

nominal interest rate

before-tax real interest rate

reduction in nominal interest rate

after-tax nominal interest rate

after-tax real interest rate

c. The nominal interest rate is four percent and the inflation rate is one percent.

Find:

nominal interest rate

before-tax real interest rate

reduction in nominal interest rate

after-tax nominal interest rate

after-tax real interest rate

Answer 1

a) before-tax real interest rate = nominal interest rate - inflation rate

= 10% - 5%

= 5%

reduction in nominal interest = nominal interest rate multiplied by tax rate

= 10*40%

= 4%

after-tax nominal interest rate = nominal interest rate - reduction in nominal interest

= 10% - 4%

= 6%

after-tax real interest rate = after-tax nominal - inflation rate

= 6% - 5%

= 1%

b)

before-tax real interest rate = nominal interest rate - inflation rate

= 6% -2%

= 4%

reduction in nominal interest = nominal interest rate multiplied by tax rate

= 6*40%

= 2.4%

after-tax nominal interest rate = nominal interest rate - reduction in nominal interest

= 6% - 2.4%

= 3.6%

after-tax real interest rate = after-tax nominal - inflation rate

= 3.6% - 2%

= 1.6%

c)

before-tax real interest rate = nominal interest rate - inflation rate

= 4% - 1%

= 3%

reduction in nominal interest = nominal interest rate multiplied by tax rate

= 4*40%

= 1.6%

after-tax nominal interest rate = nominal interest rate - reduction in nominal interest

= 4% - 1.6%

= 2.4%

after-tax real interest rate = after-tax nominal - inflation rate

= 2.4% - 1%

= 1.4%