Question

(TCO A) An individual actually earned a 4% nominal return last year. Prices went up by 3% over the year. Given that the investment income was subject to a federal tax rate of 28% and a state, and local tax rate of 6%, what was the investor's actual real after tax rate of return? Group of answer choices -0.36% 0.66% 0.72% 1.45% 2.64%

Answer 1

Answer: -0.36%

Explanation:

The actual real after tax rate of return on an investment is calculated simply by taking the after-tax return and subtracting the inflation rate.

For our question then the equation would look something like this,

= (0.04 x (1- (0.28+0.06)) - 0.03

The equation shows how first we adjust the rate for taxes (after - tax return) and then subtract the inflation rate.

= (0.04 x (1- (0.28+0.06)) - 0.03

= -0.0036

= -0.36%

The investor's actual real after tax rate of return is therefore -0.36%.

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