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. Assume the original facts as given except that Jackson is a head of household taxpayer and the city of Mitchell pays interest of 8 percent.How would you advise Jackson to invest his money?
A)Invest in Sundial, Inc.bonds because their explicit tax is greater than the implicit tax on city of Mitchell bonds.
B)Invest in city of Mitchell bonds because their implicit tax is greater than the explicit tax on Sundial, Inc.bonds.
C)Invest in Sundial, Inc.bonds because their explicit tax is less than the implicit tax on city of Mitchell bonds.
D)Invest in city of Mitchell bonds because their implicit tax is less than the explicit tax on Sundial, Inc.bonds.
E)None of the choices are correct.

Question

Quizplus · Accepted Answer

As a head of household taxpayer, Jackson's marginal tax rate will be lower than if he were a single taxpayer earning the same amount. Therefore, the implicit tax on the city of Mitchell bonds will be lower, making them a more attractive investment than the Sundial, Inc. bonds with their higher explicit tax. Additionally, even though the city of Mitchell bonds pay a lower interest rate than the Sundial, Inc. bonds, the lower tax burden will result in a higher after-tax return.

Jackson Has the Choice to Invest in City of Mitchell