You decide to put $10,000 in a money market fund that pays interest at the annual rate of 7.2%, compounding it monthly. You plan to take the money out after one year and pay the income tax on the interest earned. You are in the 25% tax bracket. Find the total amount available to you after taxes.

 You decide to put $10,000 in a money market fund that pays interest at the annual rate of 7.2%, compounding it monthly. You plan to take the money out after one year and pay the income tax on the interest earned. You are in the 25% tax bracket. Find the total amount available to you after taxes.

Answer

Interest rate = 7.2%/ 12 = 0.006

FV = 10,000 x (1.006)^12 = 10744.24

The interest earned = 10744.24-10,000=744.24

You have to pay 25% tax on this amount.

Thus after paying taxes, it becomes = 744.24 x (1-0.25) = 558.18

Total amount available after 12 months = 10,000 + 558.18 =10,558.18