Question

An individual actually earned a 4 percent nominal return last year. Prices went up by 3 percent over the year. Given that the investment income was subject to a federal tax rate of 28 percent and a state and local tax rate of 6 percent, what was the investor's actual real after-tax rate of return

Answer 1

Answer:

Actual real after tax rate of return is 0.657%

Explanation:

Use fisher method to compute real return:

$Real\ return=\frac{1+nominal\ return}{1+inflation}-1$

$Real\ return = \frac{1.04}{1.03}-1$

=0.00971 or 0.971%

Calculate after tax return as shown below:

Federal tax rate is 28% or 0.28 and state tax is 6% or 0.06.

After tax return = 0.00971×(1 - 0.28) ×(1 - 0.06)

                        = 0.00657 or 0.657%