What is hans before tax realized real interest rate

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Reference no: EM13204615

Hans lives in a country that taxes only real interest income. When Hans calculates his taxes at the end of the year, he writes down on a form how much he invested and multiplies that amount times the inflation rate for the year to arrive at his "inflation compensation amount." Hans subtracts the inflation compensation amount from his interest income to find his taxable interest income.

A - In 2001, Hans invested C40,000 and earned C2,000 in interest income, where C stands for credits, which is the monetary unit of the country which Hans lives. If the inflation rate in 2001 was 4% and Hans pays taxes equal to 25% of his income, how much will Hans pay in income tax on his interest income? What is Han's before tax realizes real interest rate? His after tax real interest rate?

B - In 2002, Hans invested C50,000 and earned C5,000 in interest income. If the inflation rate in 2002 was 6% (Still with tax rate of 25%), how much will Hans pay in income tax on his interest income? What is Han's before tax realized real interest rate?

C - Suppose that Hans had to pay taxes on his nominal interest income instead of his real interest income. Reaped the analysis in parts a and b under this assumption. Does it make much differece if taxes are based on nominal income instead of real income?

Reference no: EM13204615

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