Curtis invests $575,000 in a city of Athens bond that pays 7.75 percent interest. Alternatively, Curtis could have invested the $575,000 in a bond recently issued by Initech, Incorporated that pays 10.50 percent interest with similar risk as the city of Athens bond. Assume that Curtis's marginal tax rate is 24 percent. How much implicit tax would Curtis pay on the city of Athens bond?
A)$44,562.50
B)$4,066.00
C)$3,966.00
D)$15,812.50
E)None of the choices are correct

Question

Quizplus · Accepted Answer

First, we need to calculate how much interest Curtis would earn on the city of Athens bond:

$575,000 x 0.0775 = $44,562.50

Next, we need to calculate how much interest Curtis could have earned on the Initech bond:

$575,000 x 0.105 = $60,375

The difference between these two amounts is the implicit tax that Curtis would pay on the city of Athens bond:

$60,375 - $44,562.50 = $15,812.50

Finally, we need to apply Curtis's marginal tax rate of 24% to this amount:

$15,812.50 x 0.24 = $3,796.50

Rounding up, the answer is $3,966.00 (choice C).

Curtis Invests $575,000 in a City of Athens Bond That