Suppose Bob Considers Borrowing $100 from Sheila

question 2

Essay

Suppose Bob considers borrowing $100 from Sheila.They both think that a 4 percent real interest rate would be fair,but they are aware of a 30 percent interest income tax.Therefore,they think of the fair 4 percent real interest rate as an after-tax rate.How much should Bob pay to Sheila in interest,such that the after-tax real interest rate would be 4 percent,if they expect inflation to be 6 percent? What if the expected inflation was 8 percent? How does this affect Bob's incentive to borrow?

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Definitions:

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