Question

An individual actually earned a 4 percent nominal return last year. Prices went up by 3 percent over the year. Given that the investment income was subject to a federal tax rate of 28 percent and a state and local tax rate of 6 percent, what was the investor's actual real after-tax rate of return

Answer 1

Actual real after tax rate of return is 0.657%

Step-by-step explanation:

Use fisher method to compute real return:

`Real\ return=(1+nominal\ return)/(1+inflation)-1`

`Real\ return = (1.04)/(1.03)-1`

=0.00971 or 0.971%

Calculate after tax return as shown below:

Federal tax rate is 28% or 0.28 and state tax is 6% or 0.06.

After tax return = 0.00971×(1 - 0.28) ×(1 - 0.06)

= 0.00657 or 0.657%