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What was the expected real interest rate

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You just purchased a $1,000 debt security that pays annual nominal interest rate of 5 percent. Inflation over the coming year is expected to be 2 percent. The government taxes nominal interest income at 20 percent.

a. What was the expected real interest rate?

b. What is your after-tax real interest income expected to be at the end of the first year?

c. What share of real interest income do you keep and what share must be surrendered to the government?

Reference no: EM132272899

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