Please explain the steps. A 30-year-old buys, for $8,000 (in year...
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Please explain the steps.
A 30-year-old buys, for $8,000 (in year 0 ), an $8,000 Registered Retirement Savings Plan (RRSP) bond that will pay 5% ( $400 per year) into the plan for the next 40 years, and will then be redeemed for $8,000 plus accumulated interest. The payments go into the RRSP (starting at year 1) and also earn 5% per year. Because it is an RRSP, the purchaser receives an immediate tax rebate of $8,000 times the marginal tax rate (at a marginal tax rate of 36% ). The purchaser will pay no taxes on the annual interest earned until the end of the 40 years, when the original amount and all earned interest are withdrawn and taxed (at a future marginal rate of 26% ). At age 70, when the RRSP is redeemed, taxes must be paid on both the original $8,000 and the accumulated interest. What is the rate of return on this investment, rounded to the nearest tenth of a percent
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