Curtis invests $250,000 in a city of Athens bond that pays 7 percent interest.Alternatively, Curtis could have invested the $250,000 in a bond recently issued by Initech, Inc.that pays 9 percent interest with similar risk as the city of Athens bond.Assume that Curtis's marginal tax rate is 24 percent. 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 by choosing the tax-exempt bond. The city bond pays 7% ($17,500), and the Initech bond pays 9% ($22,500). The implicit tax is $22,500 - $17,500 = $5,000.

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