Curtis invests $250,000 in a city of Athens bond that pays 7% interest.Alternatively,Curtis could 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's marginal tax rate is 28%. How much implicit tax would Curtis pay on the city of Athens bond?

Question

Quizplus · Accepted Answer

The implicit tax is the difference in interest Curtis foregoes due to the tax-exempt status of the city bond. The city bond pays $17,500 (7% of $250,000), while the Initech bond would pay $22,500 (9% of $250,000). The difference is $5,000, which is the implicit tax.

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