Instead of 10%, you earn only 98% . 10% + 2% . (−100%) = 7.8%. Translated into a formula, this is (1 −

d) . rnominal, before tax

+ d . (−100%) = rnominal, before tax

− d . (1 + rnominal, before tax) = 10% −

2% . (1 + 10%) = 7.8%. Now, using the formula from page 334,

replace the nominal interest rate rnominal, before tax with the default reduced nominal rate rnominal, before tax −
d . (1 + rnominal, before tax), so the new formula is

Transcribed Image Text:

Tafter tax, real, post default= Vo-Co Co nominal, before tax (1-7) - 1+ Co.[1+nominal, before tax *(1-7)] Co - Co