Background Information About Me

Hello, I am Lanny Berlingieri and have been born and raised in Northeast Ohio in the Akron area. I attended The University of Akron for undergrad, earning my Bachelor's of Science in Accounting (Fall 2006-Fall 2009). 2010 was then approaching quickly and I had to decide on what I was planning to do in the middle of my last semester. I have a full-time offer with Crowe Horwath starting September 2011, which gave me around 21 months in b/w graduating and starting. I therefore took the GMAT and began taking graduate courses this semester (January 2010) towards an MBA in Finance.

Friday, February 19, 2010

Quick Post on Interest Rate Section

Quick post everyone, this is just from learning more about Real Rates of Interest & nominal rates and I felt like I HAD to post it!

There are many determinants in setting the interest rate: Household Savings, Business expenditures and government & FRB fiscal and monetary policies.

Supposed Inflation was 6%, Nominal Interest Rate was 10%.  Your Real Interest Rate using approximation method is 4% but the calculated method is only 3.77%.  It doesn't end there, because if you are earning interest you are being taxed on that as well.

Let us suppose you are in the 30% tax bracket and we will use the same figures as above.  Using approximation, your real-rate is 4%, then net after tax rate would be 4%(1-t) = 2.8%
HOWEVER, the tax code doesn't recognize that 6% of your return is no more than compensation/pay for inflation NOT REAL INCOME, therefore your after-tax real return is reduced by 6%; 6% x .3 = 1.7% and you would subtract that from your 2.8% after-tax-rate, bringing it down to a lowly 1.1% After-Tax Real Interest Rate.

Therefore, you can have a 10% return on something and in actual terms can really only mean 1.1% given the factors of inflation and taxation, weird huh?  If anyone wants equations let me know!

-Lanny B.

1 comment:

  1. How will 3.77% go down to 1.1% after tax. can you explain with the formula again. thanks,