Assume the expected returns to holding gold are equal to the inflation rate plus 2%. At...
Assume the expected returns to holding gold are equal to the inflation rate plus 2%. At what rate of expected inflation would you prefer gold over non-taxable 8% muni bonds? Your tax rate is 50%.
Homework Answers
MUNICIPAL BOND ARE TAX FREE
SO FOR NON TAXABLE ASSET, THE BEFORE TAX RETURN SHOULD BE = RATE ON MUNICIPAL BOND/(1-t)
THE BEFORE TAX RETURN SHOULD BE = 8%/(1-0.5) = 16%
SO EXPECTED RETURN ON HOLDING GOLD = 16% = INFLATION RATE + 2%
SO INFLATION RATE = 14%
ANSWER : 14% (THUMBS UP PLEASE)
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