Skip to content

CFA Level I · CFA Level I Exam · Types of Financial Returns

An analyst compares a nominal return of 6.0% with inflation of 2.5% and a tax rate of 20% applied to the nominal return. Using the convention that taxes are paid on the nominal return, the after-tax real return is closest to:

The after-tax real return is about 2.3%. Tax is first applied to the 6.0% nominal return, leaving 4.8%, and this is then deflated by 2.5% inflation: 1.048 divided by 1.025 minus one is roughly 2.24%. The 3.4% figure is the real return before tax.

  1. A1.8%
  2. B2.3%Correct
  3. C3.4%

Explanation

After-tax nominal return = 6.0% × (1 − 0.20) = 4.8%. Real = 1.048 / 1.025 − 1 = 2.24%, which is closest to 2.3%. Taxing the real return instead (3.41% × 0.8 = 2.7%) is not the stated convention, and 3.4% is the pre-tax real return.

Did you get it right without looking?

One question tells you little. A timed set on Types of Financial Returns shows your real accuracy, how long you take and where you lose marks.

Practise Types of Financial ReturnsFree diagnostic mock

More Types of Financial Returns questions