Question

Fergie has the choice between investing in a State of New York bond at 6.2 percent and a Surething Inc. bond at 9.8 percent. Assuming that both bonds have the same nontax characteristics and that Fergie has a 30 percent marginal tax rate, what interest rate does the state of New York bond need to offer to make Fergie indifferent between investing in the two bonds? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Interest Rate：

Answer 1

Interest rate is 6.86%

If New York City Provides bonds at 6.86% percent, the individual would be tax indifferent as municipal bonds are tax-exempt.

Explanation:

State of New York bond interest rate 6.2%

Surething Inc. bond rate 9.8%

marginal tax rate 30%

New York State bond is a municipal bond and is thus exempt from marginal tax. The Surething Inc is a corporation and is therefore subject to the marginal tax rate. For Fergie to be indifferent between investing in the two bonds,the rate provided by New York City should be equal to the one provide by corporation (Surething Inc.) net of tax .

The interest rate for indifference to be achieved=Surething Inc bond rate less tax.

=9.8 (1-0.3)

=(9.8 *0.7)

=6.86%