Hugh has the choice between investing in a city of heflin bond at 6.45 percent or a surething bond at 10.40 percent. assuming th

Question

3 years ago

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Hugh has the choice between investing in a city of heflin bond at 6.45 percent or a surething bond at 10.40 percent. assuming th

at both bonds have the same nontax characteristics and that hugh has a 40 percent marginal tax rate. what interest rate does surething inc., need to offer to make hugh indifferent between investing in the two bonds?

Mathematics

1 answer:

netineya [11] · Answer 1 · 2022-05-07T05:11:09+03:00

Surething Inc. must give an interest rate of 17.33 percent to generate a 10.40 percent after-tax return and make Hugh indifferent between investing in the two bonds.

To solve for the pretax rate of return, we can use this formula:

<span> After-tax return = Pre-tax return x (1 – Marginal Tax Rate). </span>

10.40% = Pre-tax return x (1 – Marginal Tax Rate);

<span>Pre-tax return = 10.40% / (1 – Marginal Tax Rate) = 17.33%</span>