Answer:
A. Virginia Bond: $4,500
North Carolina Bond: $4,451
B. Virginia Bond
Explanation:
A. Calculation to Determine the after tax income for Virginia Bond
Using this formula
After tax income for Virginia Bond=Face value*Virginia bonds of comparable risk
Let plug in the formula
After tax income for Virginia Bond=$100,000*4.5%
After tax income for Virginia Bond=$4,500
Calculation to Determine the after tax income for North Carolina Bond
Interest income before tax $4,600
(100,000*4.60)
Less State marginal tax ($230)
(5%*$4,600)
Interest income net of state tax $4,370
($4,600-$230)
Add Federal marginal tax $81
(35%*230)
After tax income for Noth Caroline Bond $4,451
Therefore the the after tax income from each bond will be:
Virginia Bond: $4,500
North Carolina Bond: $4,451
B. Based on the above calculation the options that will provide the greater after-tax return to Tammy will be VIRGINIA BOND reason be that it has high After tax income of the amount of $4,500 compare to Noth Caroline Bond which has After tax income of the amount of $4,451.
