Question

Jackson has the choice to invest in city of Mitchell bonds or Sundial, Inc. corporate bonds that pay 7.4 percent interest. Jackson is a single taxpayer who earns $70,000 annually. Assume that the city of Mitchell bonds and the Sundial, Inc. bonds have similar risk.

What interest rate would the city of Mitchell have to pay in order to make Jackson indifferent between investing in the city of Mitchell and the Sundial, Inc. bonds for 2019? (Use tax rate schedule)

Multiple Choice

• 5.17 percent

• 5.97 percent

• None of the choices are correct

• 5.77 percent

• 7.40 percent

Answer 1

Answer:

From Tax Schedule, the margin Tax rate for Jackson Where his income is $ 70,000 is 22%

After-tax rate of return                   = percentage of Interest x ( 1- Marginal tax rate)                 =   7.4% x ( 1 - 22% )                = 7.4% x 0.78                =   5.77 %

Cty of Mitchell have to pay 5.77 % in order to make Jackson indifferent

Option (d) is Correct - 5.77%