Curtis invests $500,000 in a city of Athens bond that pays 7.25 percent interest. Alternatively, Curtis could have invested the $500,000 in a bond recently issued by Initech, Incorporated that pays 7.75 percent interest with similar risk as the city of Athens bond. Assume that Curtis's marginal tax rate is 24 percent. How much explicit tax would Curtis incur on interest earned on the Initech, Incorporated bond?

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The interest earned on the Initech, Incorporated bond would be $500,000 * 7.75% = $38,750. The explicit tax incurred on this interest at a 24% marginal tax rate would be $38,750 * 24% = $9,300.

Curtis Invests $500,000 in a City of Athens Bond That