**Question**: One year ago Sam purchased bonds for $100,000. He just sold them for $120,000. During the year the price level rose by 5%. If the tax rate on capital gains is 20%, how much did Sam gain in real terms?

**ANSWER: %10.48**

Sam purchased bonds worth = 100000

He sold them for = 120000

Sam made a profit of = 20000

Sam was taxed 20% = 4000

Sam’s net profit = 16000

Nominal rate of return 16000/100000 = 0.16

The price level rose by 5% = 0.05

Real interest rate ( 1 + nominal rate)/(1+inflation rate) – 1 = 10.48%

So the real rate of **return was 10.48% **