Curtis invests $250,000 in a city of Athens bond that pays 7% interest. Alternatively, Curtis 8c5o)uld have invested the $250,000 in a bond recently issued by Initech, Inc. that pays 9% interest with similar risk as the city of Athens bond. Assume that Curtis' marginal tax rate is 28%.If Curtis invested in the Initech, Inc. bonds, what would be his after-tax rate of return from this investment?
A) 7.00%
B) 5.04%
C) 6.48%
D) 2.52%
E) None of the choices are correct.

Question

Quizplus · Accepted Answer

The before-tax return from the Initech bond would be 9%. However, Curtis' after-tax return would be lower due to his marginal tax rate of 28%. So, his after-tax return would be:

After-tax return = Before-tax return x (1 - Marginal tax rate)
After-tax return = 9% x (1 - 0.28)
After-tax return = 6.48%

Therefore, if Curtis invested in the Initech, Inc. bonds, his after-tax rate of return from this investment would be 6.48%. So, the best choice is C.

Curtis Invests $250,000 in a City of Athens Bond That