Curtis invests $250,000 in a city of Athens bond that pays 7% interest. Alternatively, Curtis could have invested the $250,000 in a bond recently issued by Initech, Inc. that pays 9% interest with similar risk as the city of Athens bond. Assume that Curtis's marginal tax rate is 24%. How much implicit tax would Curtis pay on the city of Athens bond?
A) $17,500
B) $1,400
C) $1,300
D) $5,000
E) None of the choices are correct.

Question

Quizplus · Accepted Answer

The implicit tax equals the difference in pre-tax income earned from a similar (same risk) bond. In this case: (250,000 × 0.09) - (250,000 × 0.07) = $5,000.

Curtis Invests $250,000 in a City of Athens Bond That