George can invest $10,000 in a tax-exempt bond paying 6 percent interest or a $10,000 corporate bond paying 8 percent interest.What is the lowest marginal tax rate at which George will be better off investing in the tax-exempt bond?

Question

Quizplus · Accepted Answer

To calculate the after-tax returns for both bonds, we need to use the formula:
After-tax return = yield x (1 - marginal tax rate)
For the tax-exempt bond, the after-tax return is simply 6% since it is tax-exempt.
For the corporate bond, the after-tax return is:
8% x (1 - marginal tax rate)
Now we set up the equation:
6% = 8% x (1 - marginal tax rate)
0.06 = 0.08 - 0.08 x marginal tax rate
0.08 x marginal tax rate = 0.02
marginal tax rate = 0.02 / 0.08 = 0.25 = 25%
Therefore, if George's marginal tax rate is below 25%, he will be better off investing in the tax-exempt bond. Since 28% is the lowest option above 25%, the answer is C.

George Can Invest $10,000 in a Tax-Exempt Bond Paying 6