Q1. Loretta buys a one-year debt security on December 31, 2015, for $10,000, which will pay her a nominal interest rate of 5% percent. From December 31, 2015, to December 31, 2016, the inflation rate is 2 percent. Loretta has a tax rate of 40 percent. Answer following questions and show your work.
1. How much nominal interest (in dollars) does Loretta earn during the year? Show your work.
2. How much (in dollars) does Loretta pay in taxes on her interest income? Show your work.
3. How much (in dollars) is Loretta's after-tax nominal income? Show your work.
4. How much principal (in dollars) does Loretta lose because of inflation? Show your work.
5. How much real interest income (in dollars) does Loretta earn? Show your work.
6. How much (in dollars) is Loretta's after-tax real interest income? Show your work.
7. What percent of Loretta's nominal interest income goes to: (1) her, in the form of after-tax real interest income; (2) the government, in the form of taxes; and (3) inflation, in the form of lost principal value?