A foreign investor who holds tax exempt Eurobonds paying 9 percent interest is considering investing in an equivalent risk domestic bond in a country with a 28 percent withholding tax on interest paid to foreigners. If 9 percent after-tax is the investor's required return, what before-tax rate would the domestic bond need to pay to provide that after-tax return?

Question

Quizplus · Accepted Answer

To achieve a 9% after-tax return with a 28% withholding tax, the before-tax rate must be 9% / (1 - 0.28) = 12.50%.

A Foreign Investor Who Holds Tax Exempt Eurobonds Paying 9