Hannah has $20,000 invested in corporate bonds with a stated interest rate of 6 percent and $20,000 in tax-exempt municipal bonds issued for governmental activities with a stated interest rate of 5 percent.What is her annual after-tax cash flow from interest income for each investment if her marginal tax rate is 24%?

Question

Quizplus · Accepted Answer

The interest from municipal bonds is tax-exempt, so Hannah earns 5% of $20,000 = $1,000 from them without owing any taxes on this income. For the corporate bonds, she earns 6% of $20,000 = $1,200, but she must pay taxes at her marginal rate of 24% on this income. The tax on the corporate bond interest is 24% of $1,200 = $288, so her after-tax income from the corporate bonds is $1,200 - $288 = $912.

Hannah Has $20,000 Invested in Corporate Bonds with a Stated