Assuming a 1-year, money market account investment at 4.38 percent (APY), a 2.91

Question

Assuming a 1-year, money market account investment at 4.38 percent (APY), a 2.91% inflation rate, a 28 percent marginal tax bracket, and a constant $50, 000

balance, calculate the after-tax rate of return, the real return and the total monetary return. What are the implications of this result for cash management decisions? Assuming a 1-year, money market account investment at 4.38 percent (APY), a 2.91% inflation rate, a 28 percent marginal tax bracket, and a constant $50, 000

balance, calculate the after-tax rate of return, the real return and the total monetary return. What are the implications of this result for cash management decisions?

Question - Assuming a 1-year, money market account investment at 4.38 percent (APY), a 28 percent marginal tax bracket, and a constant $50, 000 balance the after-tax rate of return is ? %.(Round to two decimal places.)

Explanation / Answer

Step :1

After Tax rate of return = Rate of return ( 1- Tax rate)

= 4.38% ( 1- 0.28)

= 3.15%

Step 2:

The real rate of return = after tax rate of return - inflation rate

= 3.15% - 2.91%

= 0.24%

or

Fisher says that Real rate is approximately equal to Nominal - Inflation i.e. 0.24%
Fisher based his equation off of: (1+nominal) = (1+Real)(1+inflation) thus,

real rate = [(1+ nominal return/ 1+ inflation rate) -1] *100

= [(1.0315/ 1.0291)-1]*100

= 0.23%

step 3:

Total monetary return = constant $50000 * real return

= $50000 * 0.24%

= $120

or

= $ 50000 *0.23%

= $ 115

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