Question

Curtis invests $250,000 in a city of Athens bond that pays 7% interest. Alternatively, Curtis could have invested the $250,000 in a bond recently issued by Initech, Inc. that pays 9% interest with similar risk as the city of Athens bond. Assume that Curtis's marginal tax rate is 24%. If Curtis invested in the Initech, Inc. bonds, what would be his after-tax rate of return from this investment?

Answer 1

Answer:

after-tax rate of return from this investment = 6.48 %

Explanation:

given data

invested = $250,000

interest 1 = 7%

interest 2 = 9%

marginal tax rate = 24%

to find out

after-tax rate of return from this investment

solution

we know that after-tax rate of return from this investment will be here

after-tax rate of return from this investment = [ ( 1 - marginal tax rate ) × ( investment  × interest 2) ] ÷ investment     ...........................1

put here value we get

after-tax rate of return from this investment = [ ( 1 - 0.28 ) × ( $25000×0.09)] ÷$25000

so

after-tax rate of return from this investment =  0.0648

so

after-tax rate of return from this investment = 6.48 %