CFA Level I · CFA Level I Exam · Types of Financial Returns
An investor earns a pre-tax return of 8.0% on a bond fund, and all of the return is taxed at 30%. The after-tax return is closest to:
The after-tax return is about 5.6%. Multiply the 8.0% pre-tax return by one minus the 30% tax rate, giving 8.0% × 0.70 = 5.6%. The 2.4% option is the tax paid, not the return left after tax.
- A2.4%
- B5.6%Correct
- C7.7%
Explanation
After-tax return = pre-tax return × (1 − tax rate) = 8.0% × 0.70 = 5.6%. The 2.4% figure is the tax amount (8.0% × 0.30), a mistake of reporting the tax instead of the remainder.
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