If the Real Rate of Return Is 2% (Before Taxes)

question 9

Multiple Choice

If the real rate of return is 2% (before taxes) , the rate of inflation is 5%, and your marginal tax rate is 25%, what is your after-tax nominal return on a risk-free investment? Round your
Answer to the nearest tenth of a percent.

• A)2.2%
• B)5.3%
• C)1.8%
• D)7.3%

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Definitions:

Holding Company

A type of business entity created to own and manage interests in other companies, without being involved in their operations.

Separate Legal Entities

Organizations that are legally independent from their owners, with their own rights and obligations.

Acquired Businesses

Businesses that have been purchased and taken over by another company. Acquisitions can be a strategy for growth, diversification, or gaining competitive advantage.

Junk Bonds

High-yield, high-risk securities issued by companies or municipalities with lower credit ratings, offering investors potentially higher returns in exchange for the increased risk.