What is post inflation after tax post default rate of return

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Reference no: EM131235596

Assume there is a 10% nominal rate of return, a tax rate of 40%, and an inflation rate of 5%.

(In the taxes-and-inflation example from Formula 10.1 we worked out that the post-inflation, after tax rate of return was 0.95%.) Now, add a default rate, d, of 2%, where all money is lost (-100% return).

What is the real, post-inflation, after tax, post-default rate of return?

(Hint: Losses are tax-deductible, too. Assume that the default rate reduces the nominal rate of return (on which taxes are charged) because you do not just take 1 such loan, but 1 million, which practically assures you of the exact default rate without any sampling variation.)

Reference no: EM131235596

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