Question

Wesley decided to invest in the Bank of America in a $ 10,000 certificate of deposit for 5 years that pays an interest rate of 3.5% annually (simple interest). Suppose that the interest payment is sent annually to your home by check and that this money is taxable. When the certificate matures, he will receive his $ 10,000 back (non-taxable amount). Wesley's marginal tax rate is 24% and headline inflation is expected to be 2% per year.

Determine for this investment instrument:
(a) The rate of return before tax, ignoring inflation.
(b) The rate of return after tax, ignoring inflation
(c) The rate of return after taxes, considering inflation
You must use Excel to solve these problems and display all your computations. Include comments and annotations when you deem it necessary (for example, to make a presumption).

PLEASE HELP ME. USE EXCEL ONLY AND ITS FUNCTIONS. Thanks a lot. It's very important to my class.

Answer 1

(a) The rate of return before tax, ignoring inflation

Investment amount	$10,000
Interest rate	3.50%
time period (in years)	5
Before-tax interest	$1,750.00
rate of return	17.50%

Calculation

(b) The rate of return after tax, ignoring inflation

Investment amount	$10,000
Interest rate	3.50%
time period (in years)	5
Before-tax interest	$1,750.00
marginal tax rate	20%
After-tax interest	$1,400.00
rate of return	14.00%

Calculation

(c) The rate of return after taxes, considering inflation

The interest rate of 3.5% on certificate of deposit is a nominal interest rate. nominal interest rate means it includes compensation for inflation. if we remove inflation effect from nominal interest rate then we will get real interest rate which is real interest we will earn from certificate of deposit.

Investment amount	$10,000
Nominal Interest rate	3.50%
Inflation rate	2.00%
Real interest rate	1.47%
time period (in years)	5
Before-tax interest	$735.29
marginal tax rate	20%
After-tax interest	$588.24
rate of return	5.88%

Calculation