taking in°ation into account? Use 2 decimal places for the interest rate.Real rate of interest:i°r1 +r=0:0386°0:02071 + 0:0207:= 0:01753698442:= 1:75%(e) Suppose that the interest earned on the bond is taxable at a rate of 40%. (Interest earnings are often taxableat the investor’s marginal tax rate. Here we will assume that rate is 40%.):Suppose further that an investorhad the option in 2000 to invest in a tax-sheltered investment offering an interest rate ofj12= 2:4%:Determine the real annual interest rates for each option taking the in°ation rate and the tax rate (whereappropriate) into consideration. Based on your calculations, which option is better?Real rate for the bond:0:0386 (0:6)°0:02071 + 0:0207:= 0:002410110708:= 0:24%1 +j=°1 +0:02412±12)j=°1 +0:02412±12°1:= 0:024265768ireal=0:024265768°0:02071 + 0:0207:= 0:00349345351:= 0:35%The tax-sheltered option is the better option.2
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3.[6marks]Anika lends an acquaintance $800 with the following terms:$150 to be repaid in four months;$200 to be repaid in six months, $275 to be repaid in eight months and $250 tobe repaid in 11 months.Assume that interest is compounded monthly. Use atime diagramand the given focal dates to construct anappropriate equation of value with unknownj12.Do not try to solve the equations forj12:(a) focal date = date of the loan;800 = 150°1 +j1212±°4+ 200°1 +j1212±°6+ 275°1 +j1212±°8+ 250°1 +j1212±°11(b) focal date = 7 months from the date of the loan.800°1 +j1212±7= 150°1 +j1212±3+ 200°1 +j1212±+ 275°1 +j1212±°1+ 250°1 +j1212±°44.[5marks]Jack has two loans to repay. The ±rst loan, which accrues interest atj12= 12%
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