Question

Curtis invests $200,000 in a city of Athens bond that pays 4.00 percent interest. Alternatively, Curtis could have invested the $200,000 in a bond recently issued by Initech, Incorporated that pays 5.00 percent interest with similar risk as the city of Athens bond. Assume that Curtis's marginal tax rate is 24 percent. If Curtis invested in the Initech, Incorporated bonds, what would be his after-tax rate of return from this investment?

Answer 1

- Initech Incorprated pays 5% interest on Bonds carrying smiliar isk as the city of Athens bond.

- If Curtis invested in the Initech, Incorporated bond, after-tax rate of return from this investment = Interest on Bonds*(1- Marginal Tax rate)

= 5%*(1-0.24)

After-tax rate of return from this investment = 3.80%

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