3. You buy a certificate of deposit (CD) that pays a nominal rate of 12% annually. You have a tax rate of 25%, so if the interest on this CD is taxable (which it may not be), your after-tax nominal rate is (125%)12%=9%. Since 10% equals .1, we can rewrite the equation as (1 .25).12=.09. For parts (A-C), the nominal rate of 12% annually, and the after-tax nominal rate is 9%. A. If the inflation rate is 6% and interest on this CD is not taxable, what is the real interest rate on the CD? Hint: What is the relationship between the actual rate of interest and the nominal rate of interest? (2 points) B. If the inflation rate is 6% and the interest on this CD is taxable, what is the real interest rate on the CD? ( 2 points) C. How does taxation of interest affect the real return on the CD when the nominal rate is 12% and inflation is 6%? ? 2 points) D. Now, if the inflation rate is 18%, the nominal rate of interest on the CD is 24%, and the interest is not taxable, what is the real interest rate on the CD? ( 2 points) E. If the inflation rate is 18%, the nominal rate of interest on the CD is 24%, and the interest is taxable (at a rate of 25% ), what is the after-tax real interest rate on the CD? (2 points) Hint: first calculate the after-tax nominal rate. 3. You buy a certificate of deposit (CD) that pays a nominal rate of 12% annually. You have a tax rate of 25%, so if the interest on this CD is taxable (which it may not be), your after-tax nominal rate is (125%)12%=9%. Since 10% equals .1, we can rewrite the equation as (1 .25).12=.09. For parts (A-C), the nominal rate of 12% annually, and the after-tax nominal rate is 9%. A. If the inflation rate is 6% and interest on this CD is not taxable, what is the real interest rate on the CD? Hint: What is the relationship between the actual rate of interest and the nominal rate of interest? (2 points) B. If the inflation rate is 6% and the interest on this CD is taxable, what is the real interest rate on the CD? ( 2 points) C. How does taxation of interest affect the real return on the CD when the nominal rate is 12% and inflation is 6%? ? 2 points) D. Now, if the inflation rate is 18%, the nominal rate of interest on the CD is 24%, and the interest is not taxable, what is the real interest rate on the CD? ( 2 points) E. If the inflation rate is 18%, the nominal rate of interest on the CD is 24%, and the interest is taxable (at a rate of 25% ), what is the after-tax real interest rate on the CD? (2 points) Hint: first calculate the after-tax nominal rate
