Darnell receives a portion of his income from his holdings of interest-bearing U.S. government bonds. The bonds offer a real interest rate of 4% per year. The nominal interest rate on the bonds adjusts automatically to account for the inflation rate. The government taxes nominal interest income at a rate of 20%. The following table shows two scenarios: a low-inflation scenario and a high-inflation scenario. Given the real interest rate of 4% per year, find the nominal interest rate on Darnell's bonds, the after-tax nominal interest rate, and the after-tax real interest rate under each inflation scenario. Inflation Rate Real Interest Rate Nominal Interest Rate After-Tax Nominal Interest Rate After-Tax Real Interest Rate (Percent) (Percent) (Percent) (Percent) (Percent) 2.5 4.0 8.5 4.0 Compared with higher inflation rates, a lower inflation rate will the after-tax real interest rate when the government taxes nominal interest income. This tends to saving, thereby the quantity of investment in the economy and the economy's long-run growth rate.

Darnell receives a portion of his income from his holdings of interest-bearing U.S. government bonds. The bonds offer a real interest rate of 4% per year. The nominal interest rate on the bonds adjusts automatically to account for the inflation rate. The government taxes nominal interest income at a rate of 20%. The following table shows two scenarios: a low-inflation scenario and a high-inflation scenario. Given the real interest rate of 4% per year, find the nominal interest rate on Darnell's bonds, the after-tax nominal interest rate, and the after-tax real interest rate under each inflation scenario. Inflation Rate Real Interest Rate Nominal Interest Rate After-Tax Nominal Interest Rate After-Tax Real Interest Rate (Percent) (Percent) (Percent) (Percent) (Percent) 2.5 4.0 8.5 4.0 Compared with higher inflation rates, a lower inflation rate will the after-tax real interest rate when the government taxes nominal interest income. This tends to saving, thereby the quantity of investment in the economy and the economy's long-run growth rate.

SWFT Comprehensive Vol 2020

43rd Edition

ISBN:9780357391723

Author:Maloney

Publisher:Maloney

Chapter4: Gross Income: Concepts And Inclusions

Section: Chapter Questions

Problem 8DQ

See similar textbooks

Similar questions

Pat receives a portion of his income from his holdings of interest-bearing U.S. government bonds. The bonds offer a real interest rate of 2% per year. The nominal interest rate on the bonds adjusts automatically to account for the inflation rate. The government taxes nominal interest income at a rate of 20%. The following table shows two scenarios: a low-inflation scenario and a high-inflation scenario. Given the real interest rate of 2% per year, find the nominal interest rate on Pat's bonds, the after-tax nominal interest rate, and the after-tax real interest rate under each inflation scenario. Inflation Rate Real Interest Rate Nominal Interest Rate After-Tax Nominal Interest Rate After-Tax Real Interest Rate (Percent) (Percent) (Percent) (Percent) (Percent) 1.0 2.0 7.5 2.0 Compared with lower inflation rates, a higher inflation rate will (increase/decrease?) the after-tax real interest rate when the government taxes…
In this economy, there are 10,000 borrowers. Each person borrows $100 for a 1 year loan. For the lender not to make a loss, the lender must set an interest rate such that they earn at least as much as their outside option of not lending to people from all borrowers that did not default in this economy. In this case, the outside option is the risk-free interest rate on a 1-year US Treasury securtiy. The 1-year USTS pays annual interest rate of i = 0.03. What is the %3D minimum interest rate that the lender will charge to borrow money in this economy
n this economy, there are 10,000 borrowers. Each person borrows $100 for a 1 year loan. For the lender not to make a loss, the lender must set an interest rate such that they earn at least as much as their outside option of not lending to people from all borrowers that did not default in this economy. In this case, the outside option is the risk-free interest rate on a 1-year US Treasury securtiy. The 1-year USTS pays annual interest rate of i = 0.03. What is the minimum interest rate that the lender will charge to borrow money in this economy
Treasure bills (T-bills) are used by the U.S. Treasury Department to finance the public debt. Suppose a 180-day T-bill with a maturity value of $10,000 is purchased for $9,885.56. What annual simple interest rate is earned on this T-bill? (Answer as a percentage rounded to three decimal places.) I = PRT, A = P+I
A promissory note is a written statement agreeing to pay a sum of money either on demand or at a definite future time. When a note is purchased for its present value at a given interest rate, the note is said to be discounted and the interest rate is called the discount rate. Suppose a $10,000 note due 7 years from now is sold to a financial institution for $5600. What is the nominal discount rate with quarterly compounding? The nominal rate is %. (Type an integer or decimal rounded to two decimal places as needed.)
DBF borrows $3.29B by issuing 12-year bonds. ECB's cost of debt is 6.07%, so it will need to pay interest each year for the next 12 years, and then repay the principal $3.29B in year 12. ECB's marginal tax rate will remain 42.99% throughout this period. By how much does the interest tax shield increase the value of DBF? NOTE: Provide your answers in Millions. E.G. for 100M you must enter 100.0000, for 20M you must enter 20.000, etc.
Currently, a three-year Treasury note pays 10.0%. Assuming that your tax rate is 15%, what is the minimum interest rate that you would you need to earn on a tax-free municipal bond in order to buy it instead? Select one: O a. 8.5% O b. 10.0% O c. 11.0% O d. 9.0%
Raj Patel, the treasurer of SDM Associates, believes interest rates are going to rise, so he wants to swap his future floating rate interest payments for fixed rates. At present he is paying LIBOR + 1.5% per annum on U.S. Dollar ($) 5,000,000 of debt for the next two years, with payments due semi-annually. LIBOR is currently 1.50% per annum. Raj has just made an interest payment today, so the next payment is due six months from today. Raj finds that he can swap his current floating rate payments for fixed payments of 5.50% per annum (vs. receiving LIBOR payments from the swap bank). SDM Associates’ cost of capital is 9.5%, which Raj calculates to be 4.25% per six month period, compounded semi-annually. Note: Assume there are 360 days in a year. LIBOR is the London Interbank Offered Rate. (i) If LIBOR rises at the rate of 50 basis points per six month period, starting tomorrow, how much would Raj save or cost his company by making this swap? (ii) If LIBOR falls at the rate of 25 basis…
8. Inflation-induced tax distortions Rajiv receives a portion of his income from his holdings of interest-bearing U.S. government bonds. The bonds offer a real interest rate of 4.5% per year. The nominal interest rate on the bonds adjusts automatically to account for the inflation rate. The government taxes nominal interest income at a rate of 10%. The following table shows two scenarios: a low-inflation scenario and a high- inflation scenario. Given the real interest rate of 4.5% per year, find the nominal interest rate on Rajiv's bonds, the after-tax nominal interest rate, and the after-tax real interest rate under each inflation scenario. Inflation Rate Real Interest Rate Nominal Interest Rate After-Tax Nominal Interest Rate After-Tax Real Interest Rate (Percent) (Percent) (Percent) (Percent) (Percent) 2.0 4.5 8.5 4.5 Compared with lower inflation rates, a higher inflation rate will the after-tax real interest rate when the government taxes nominal interest income. This tends to…
Because simple interest is used on short-term notes, the time period is often given in days rather than months or years. We convert this to years by dividing by 360, assuming a 360 day year called a banker's year. 1. T-bills (Treasury bills) are one of the instruments the U.S. Treasury Department uses to finance public debt. If you buy a 210-day T-bill with a maturity value of $18,750 for $18,307.34, what annual simple interest rate will you earn? Express your answer as a percentage. %. Round to the nearest thousandths of a percent (3 decimal places). 2. To complete the sale of a house, the you accept a 320-day note for $8,000 at 9% simple interest. (Both interest and principal are repaid at the end of the 320 days.) Wishing to use the money sooner for the purchase of another house, the you sell the note to a third party for $8,116 after 40 days. What annual simple interest rate will the third party receive for the investment? Express your answer as a…
Suppose a borrower and a lender enter into an agreement for a car loan, which lasts for one year. The nominal interest rate (i) is 11%. Both the borrower and the lender expect inflation in one year to be 4% (rº =4%). Scenario I. Suppose the next year, when the borrower repays the loan, the actual inflation (A )turns out to be 6%. Expected inflation a year ago was 4%. Actual inflation (1) is (greater than/lower than) expected inflation ( n°, . The ex-ante real interest rates is_ %. The ex-post real interest rates is %. Conclusion from scenario I: When actual inflation is greater than expected inflation, ex-ante real interest rate is _(greater than/lower than) the ex-post real interest rate, which means that borrowers are made (worse off/better off) and lenders are made (worse off/better off). Nominal interest rates should (rise/fall) according to the Fisher effect.
ECB borrows $1,000,000 USDs by issuing 6-year bonds. ECB's cost of debt is 5%, so it will need to pay $50,000 USDs in interest each year for the next 6 years, and then repay the principal $1,000,000 USD in year 6. ECB's marginal tax rate will remain 35% throughout this period. By how much (in USDs) does the interest tax shield increase the value of ECB? Note: Express your answers in strictly numerical terms. For example, if the answer is $500, enter 500 as an answer.