Given a Nominal Interest Rate of 5 Percent, in Which

question 250

Multiple Choice

Given a nominal interest rate of 5 percent, in which of the following cases would you earn the highest after-tax real rate of interest?

• A)Inflation is 3 percent; the tax rate is 20 percent.
• B)Inflation is 2 percent; the tax rate is 40 percent.
• C)Inflation is 1 percent; the tax rate is 60 percent.
• D)The after-tax real interest rate is the same for all of the above.

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Definitions:

High Risk

Referring to investments or activities with a greater than usual potential for loss or that may involve significant uncertainty.

Equity Method

An accounting technique used to record investments in other companies where the investor has significant influence but not full control.

Investment Account

A financial account that holds securities, cash, and other investments for investors, typically managed by a financial institution or investment firm.

Dividend Income

Income received from owning shares in a company, typically paid out from the company's earnings to its shareholders at set intervals.