A bondholder in the 30 percent tax bracket owns a $1000 Treasury bond with an 8 percent coupon rate. What is the after-tax return on the bond?
A) 8 percent
B) 2.4 percent
C) 5.6 percent
D) 5 percent

Question

Quizplus · Accepted Answer

The after-tax return is calculated by taking the coupon rate and subtracting the tax impact. The bond pays 8% of $1000, which is $80 annually. The tax on this interest is 30% of $80, which is $24. Therefore, the after-tax return is $80 - $24 = $56. The after-tax return as a percentage of the bond's face value is $56/$1000 = 5.6%.

A Bondholder in the 30 Percent Tax Bracket Owns a $1000