Will invests $20,000 of after- tax dollars (AT$) in tax- exempt municipal bonds which yield 5% per year. He reinvests the interest in the same bonds and holds the bonds for two years. Will's marginal tax rate is 25%. What is his after- tax accumulation at the end of two years?

Question

Quizplus · Accepted Answer

The interest from tax-exempt municipal bonds is not subject to taxes. Therefore, the interest compounds annually at 5%. After two years, the accumulation is $20,000 * (1 + 0.05)^2 = $22,050.

Will Invests $20,000 of After- Tax Dollars (AT$) in Tax-