If Tom invests $60,000 in a taxable corporate bond that provides a 5 percent before-tax return, how much will Tom's investment be worth in either 8 or 20 years from now when the bond matures? Assume Tom's marginal tax rate is 35 percent.
A)$88,647; $159,198
B)$92,782; $178,414
C)$79,621; $121,716
D)$77,495; $113,750
E)None of the choices are correct.

Question

Quizplus · Accepted Answer

The after-tax return is 5% * (1 - 0.35) = 3.25%. Using the formula for compound interest, the investment will be worth $60,000 * (1 + 0.0325)^8 = $77,495 in 8 years and $60,000 * (1 + 0.0325)^20 = $113,750 in 20 years.

If Tom Invests $60,000 in a Taxable Corporate Bond That