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If the tax rate is 40%, what is the after-tax real interest rate under these circumstances?


a. The nominal interest rate is 10 percent and the inflation rate is 5 percent.
b. The nominal interest rate is 6 percent and the inflation rate is 2 percent.
c. The nominal interest rate is 4 percent and the inflation rate is 1 percent.

538 day(s) ago

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BruinCPA 		Sounds like questions on a test. You aren't cheating are you?

The questions are not very well worded because we do not know the length of the loan and other issues relating to amortization of the loan. But I don't think you...or your teacher ... are thinking about those things.

In general the formula for the cost of interest would be (1-Tax Rate) X (Interest Rate - Inflation Rate)

Which would give
A. 3%
B 2.4%
C 1.8%


In real life though, I would ignore inflation in most cases which would give
A. 6%
B 3.6%
C 2.4%

Posted 538 days ago

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