Suppose the one-year T-bill rate was 5% on 1/1/2007, 4% on 1/1/2008, and 6% on 1/1/2009. The GDP deflator (2004 = 100) was 110 on 1/1/2007, 112 on 1/1/2008, 114 on 1/1/2009, and 120 on 1/1/2010. The tax rate on interest income is 30%.(a)Calculate the nominal after-tax rate of return for 2007, 2008, and 2009.(b)If you began with $1000 on 1/1/2007 and invested in T-bills each year (paying taxes at the end of each year), how much would you have in nominal terms on 1/1/2010? How much would you have in real terms (2004 dollars)?(c)How much was your nominal after-tax interest earned in part (b) over the three years? How much did you earn in real (2004) after-tax dollars?
What will be an ideal response?
| (a) | 2007: 3.5% = 0.05 × .7; 2008: 2.8% = 0.04 × 0.7; 2009: 4.2% = .06 × 0.7 |
| (b) | Nominal: $1108.67 = $1000 × 1.035 × 1.028 × 1.042; Real: $923.89 = $1108.67/(120/100) |
| (c) | Nominal: $108.67 = $1108.67 - $1000; Real: $14.80 = $923.89 - $1000/(110/100) = $923.89 - |
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