The Nominal Interest Rate on Taxable Bonds Is 8%,while on Municipal

question 37

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 real after-tax 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%?

---

Definitions:

Andes

A major mountain range in South America, extending over seven countries and home to diverse cultures and historical civilizations.

Western Coast of Africa

The coastline along the Atlantic Ocean in West Africa, extending from Senegal to Angola, known for its rich history, including the transatlantic slave trade.

Trading Posts

were locations established primarily for the purpose of trading goods between traders and local populations, significant during the era of exploration and colonial expansion.

Zuni

A Native American tribe primarily located in New Mexico, known for their unique cultural practices, religious beliefs, and handmade jewelry.