Sam Deposits Money into an Account with a Nominal Interest

question 89

Multiple Choice

Sam deposits money into an account with a nominal interest rate of 4 percent.He expects inflation to be 1.5 percent.His tax rate is 32 percent.Sam's after-tax real rate of interest

• A)will be 1.2 percent if inflation turns out to be 1.5 percent;it will be higher if inflation turns out to be lower than 1.5 percent.
• B)will be 1.2 percent if inflation turns out to be 1.5 percent;it will be lower if inflation turns out to be lower than 1.5 percent.
• C)will be 1.7 percent if inflation turns out to be 1.5 percent;it will be higher if inflation turns out to be lower than 1.5 percent.
• D)will be 1.7 percent if inflation turns out to be 1.5 percent;it will be lower if inflation turns out to be lower than 1.5 percent.

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Definitions:

Compounded Monthly

An interest calculation method where interest earned is added to the principal balance every month, increasing the amount of future interest accrued.

Compounded Semi-Annually

Interest calculation method where the interest is added to the principal biannually, leading to interest on interest.

Quarterly Compounded

Interest on an investment or loan that is calculated and added to the principal balance four times a year.

Nominal Rate

The advertised or stated interest rate on a loan or investment, not accounting for compounding or inflation.