Asked by Rachel Sanchez on Apr 27, 2024
Verified
You earned 8% on your corporate bond portfolio this year, and you are in a 15% federal tax bracket. If over your holding period inflation was 3%, your real after-tax rate of return was ________.
A) 6.8%
B) 3.69%
C) 4.91%
D) 4.25%
Corporate Bond Portfolio
A diversified collection of corporate bonds held by an investor or institution aimed at achieving specified financial goals.
Federal Tax Bracket
A range of incomes subject to a particular income tax rate, determined by the U.S. federal government.
Real After-tax Rate
The rate of return on an investment after adjusting for taxes and inflation, providing a clearer measure of purchasing power gain or loss.
- Calculate real after-tax rates of return for different investment options.
Verified Answer
SY
Sonja YvetteMay 01, 2024
Final Answer :
B
Explanation :
After-tax return before inflation = 0.08 × (1 − 0.15) = 0.068, or 6.8%
Real after-tax return = 1.068/1.03 − 1 = 3.69%
Real after-tax return = 1.068/1.03 − 1 = 3.69%
Learning Objectives
- Calculate real after-tax rates of return for different investment options.