Jackson has the choice to invest in city of Mitchell bonds or Sundial, Inc.corporate bonds that pay 10 percent interest.Jackson is a single taxpayer who earns $55,000 annually.Assume that the city of Mitchell bonds and the Sundial, Inc.bonds have similar risk. What interest rate would the city of Mitchell have to pay in order to make Jackson indifferent between investing in the city of Mitchell and the Sundial, Inc.bonds for 2019? (Use tax rate schedule.)
A)7.80 percent
B)10.00 percent
C)8.00 percent
D)7.20 percent
E)None of the choices are correct

Question

Quizplus · Accepted Answer

Jackson's marginal tax rate is 22% for 2019. To be indifferent, the after-tax yield from Sundial bonds should equal the tax-free yield from city bonds. The after-tax yield from Sundial is 10% * (1 - 0.22) = 7.8%.

Jackson Has the Choice to Invest in City of Mitchell