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24 January, 03:29

You put money into an account that earns a 5 percent nominal interest rate. The inflation rate is 2 percent, and your marginal tax rate is 20 percent. What is your after-tax real rate of interest?

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  1. 24 January, 05:35
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    The after tax real interest rate of interest is 2%

    Explanation:

    The after tax real interest rate is computed as follows:

    Given,

    Nominal interest rate is 5%

    Inflation rate is 2%

    Computing before tax real interest rate as:

    Before tax real interest rate = Nominal interest rate - Inflation rate

    = 5% - 2%

    = 3%

    Computing tax:

    = 20% tax on nominal interest rate

    = 20% * 5%

    = 1%

    Now, computing after tax real interest rate as:

    After tax real interest rate = Before tax real interest rate - Tax

    = 3% - 1%

    After tax real interest rate = 2%
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