Question

Your older brother is concerned more about investment safety than about investment performance. For example, he has invested $100,000 in safe 10-year corporate AAA bonds yielding an average of 6% per year, payable each year. His effective income tax rate is 33%, and inflation will average 3% per year. How much will his $100,000 be worth in 10 years in today's purchasing power after income taxes and inflation are taken into account?

Answer 1

real purchasing power after taxes and inflation 11,035.60758

Step-by-step explanation:

`real\: rate = (1 + interest \: (1-tax \: rate))/(1 + inflation) -1  \\\\(1+0.06 \: (1-.33))/(1.03) - 1`

real rate = 0.009902913 = 0.99% per year

`Principal * (1+ r)^(time) = Ammount`

`10,000* (1+ 0.0099)^(10) = 11,035.60758`