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Calculate the expected after-tax real interest rate

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The nominal interest rate on taxable bonds is 8%, while on municipal bonds (which aren't taxable) it is 5%. The expected inflation rate is 3% and the tax rate on interest income is 40%. Calculate the expected after-tax real interest rate on both bonds. Which would be the better investment? Now suppose the actual inflation rate turned out to be 6%. Which bond was the better investment? Would the answer change if inflation had turned out to be 0%?

Reference no: EM132405914

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