Ben has $2 comma 000 in his savings account and the bank pays an interest rate of 14 percent a year. The inflation rate is 9 percent a year. The government taxes the interest that Ben earns on his deposit at 10 percent. Calculate the nominal after-tax interest rate and the real after-tax interest rate that Ben earns. >>> Answer to 1 decimal place. >>> If your answer is negative, include a minus sign. If your answer is positive, do not include a plus sign. The nominal after-tax interest rate is nothing percent a year.

Question

Jenny Bowen

Business

12 December, 04:22

Ben has $2 comma 000 in his savings account and the bank pays an interest rate of 14 percent a year. The inflation rate is 9 percent a year. The government taxes the interest that Ben earns on his deposit at 10 percent. Calculate the nominal after-tax interest rate and the real after-tax interest rate that Ben earns. >>> Answer to 1 decimal place. >>> If your answer is negative, include a minus sign. If your answer is positive, do not include a plus sign. The nominal after-tax interest rate is nothing percent a year.

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Answers (1)

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Jason Mason · Answer 1

Answer: After Tax Nominal Rate - 12.6%

After Tax Real Rate - 3.6%

Explanation:

Real Rate of return is defined as the nominal interest rate less inflation.

The After Tax Real Rate therefore caters for tax from the Nominal rate and then deducts Inflation.

The formula is,

= Nominal Rate (1 - tax rate) - Inflation rate

= 14% (1 - 10%) - 9%

= 14 (90%) - 9

= 3.6%

The Nominal Rate is simply the Real Rate plus Inflation. The After tax real rate has already being found so the After Tax Nominal Rate is,

= 3.6 + 9

= 12.6%