Suppose the Tax Rate on Interest Income Is 25 Percent

question 38

Multiple Choice

Suppose the tax rate on interest income is 25 percent, the real interest rate is 4 percent, and the inflation rate is 4 percent. The real after-tax interest rate is

• A)0.5 percent.
• B)3.5 percent.
• C)4.0 percent.
• D)2.0 percent.
• E)-0.5 percent.

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Definitions:

Contract Rate

The agreed-upon interest rate specified in a contract, such as a loan or bond, which determines the periodic interest payments.

Premium

An amount paid in excess of the nominal or face value, often in relation to insurance policies, bonds, or shares.

Effective Interest Rate

The actual return on an investment, taking into account the effect of compounding interest as opposed to the nominal rate.

Contract Interest Rate

The interest rate specified in a loan agreement or contract, typically fixed for the life of the loan.