An investor pays 20 percent of his income in taxes and purchases a $1,000 corporate bond yielding 10 percent. The after-tax yield on this bond is

Question

Quizplus · Accepted Answer

The investor earns a 10% yield on the $1,000 bond, which is $100. Paying 20% tax on this income means the investor pays $20 in taxes (20% of $100). Therefore, the after-tax income is $80 ($100 - $20), which is an 8% yield on the original $1,000 investment.

An Investor Pays 20 Percent of His Income in Taxes