Handout 3 - Econ 3140 Fall 2009 Handout#3 1 Jane wants to save $1000 of current income With an IRA no taxes are paid on income or interest until

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Econ 3140 Fall 2009 Handout #3 1. Jane wants to save $1000 of current income. With an IRA, no taxes are paid on income paid whenever income or interest is received. Jane±s federal/state tax bracket is 35% , and the nominal interest rate is 8% . (a) How much money will Jane have if she puts her money in an IRA and withdraws (b) How much money will Jane have if she does NOT put her money in an IRA, but savings account? 2. Suppose the one-year T-bill rate was 5% on 1/1/2001, 4% on 1/1/2002, and 6% on 1/1/2003. The GDP de²ator ( 1996 = 100 ) was 110 on 1/1/2001, 112 on 1/1/2002, 114 on 1/1/2003, and 120 on 1/1/2004. The tax rate on interest income is 30% . (a) Calculate the after-tax nominal rate of return for 2001, 2002, and 2003.
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This note was uploaded on 10/10/2009 for the course ECON 3140 at Cornell University (Engineering School).

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