# Federal Income Tax Withholdings and Interest Rate Risk

THE TIME VALUE OF MONEY #1

Some financial advisors recommend you increase the amount of federal income taxes withheld from your paycheck each month so that you will get a larger refund come April 15th. That is, you take home less today but get a bigger lump sum when you get your refund. Based on your knowledge of the time value of money, what do you think of this idea? Explain.

INTEREST RATE RISK #2

Define what is meant by interest rate risk. Assume you are the manager of a $100 million portfolio of corporate bonds and you believe interest rates will fall. What adjustments should you make to your portfolio based on your beliefs?

590 words

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#### Solution Preview

THE TIME VALUE OF MONEY #1

Some financial advisors recommend you increase the amount of federal income taxes withheld from your paycheck each month so that you will get a larger refund come April 15th. That is, you take home less today but get a bigger lump sum when you get your refund. Based on your knowledge of the time value of money, what do you think of this idea? Explain.

Income Taxes:

The recommendation to increase your taxes has to be looked at carefully i.e. your financial situation, credit card debt, student loan debt, and so on. The first step is to look at how much money did you get back on your last tax return? In essence, let's say that in 2010, federal taxes filed in 2009 produced an average refund of over $3600. While it is a great idea to get a big refund around April 15th, many individuals could of divided ...

#### Solution Summary

What is meant by risk and recommendations for the increase of FITW (federal income taxes withheld) for a larger refund come April 15th.