Question

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 and use Excel only and it's functional functions please. Thanks a lot!

Answer 1

Solution:

Investment in 10,000, and interest received is 3.5% so 350 per year. As interest is taxed post tax at 24% income from interest is 266.

Maturity is untaxed.

The excel solution is as under:

The formula view is as under:

So,

a. The rate of return before tax, ignoring inflation. = 3.5%

b. The rate of return after tax, ignoring inflation = 2.6%

c. The rate of return after taxes, considering inflation = 0.6% (Note this can be directly computed as 2.6% - 2% (inflation))

-x-