Essay
The nominal interest rate on taxable bonds is 8%,while on municipal bonds (which aren't taxable)it is 5%.The expected inflation rate is 3% and the tax rate on interest income is 40%.Calculate the expected after-tax real interest rate on both bonds.Which would be the better investment? Now suppose the actual inflation rate turned out to be 6%.Which bond was the better investment? Would your answer change if inflation had turned out to be 0%?
Correct Answer:
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(taxable bond)= (1 - 0.40)8% - 3% = 1.8...View Answer
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Correct Answer:
Verified
(taxable bond)= (1 - 0.40)8% - 3% = 1.8...View Answer
Unlock this answer now
Get Access to more Verified Answers free of charge
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