Given a Nominal Interest Rate of 6 Percent,in Which of the Following

question 8

Multiple Choice

Given a nominal interest rate of 6 percent,in which of the following cases would you earn the highest after-tax real rate of interest?

• A)Inflation is 2.5 percent;the tax rate is 25 percent.
• B)Inflation is 3 percent;the tax rate is 20 percent.
• C)Inflation is 2 percent;the tax rate is 30 percent.
• D)The after-tax real interest rate is the same for all of the above.

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Definitions:

Expiration Date

In finance, this term often refers to the date on which a derivative contract, such as an option or futures contract, becomes void and ceases to trade.

Option Contract

A financial derivative contract that grants the buyer the right, but not the obligation, to buy or sell an asset at a specified price on or before a certain date.

Exercise Price

The price at which the holder of an option can buy or sell the underlying security.

European Calls

Options contracts that allow the buyer to purchase a stock or asset at a specific price on or before the expiration date, but only on that date.