Anne’s marginal income tax rate is 32 percent. She purchases a corporate bond for $10,000 and the maturity, or face value, of th
e bond is $10,000. If the bond pays 5 percent per year before taxes, what is Anne’s annual after-tax rate of return from the bond if the bond matures in 1 year? What is her annual after-tax rate of return if the bond matures in 10 years?
Anne’s after-tax rate of return from the corporate bond is 3.5% or 5% x (1-.3). Because interest from the bond is taxed annually and her rate is assumed to be constant, the after-tax rate of return doesn’t depend on her investment horizon. Thus, her annual after-tax rate of return remains at 3.5% if the bond matures in ten years.
