Curtis invests $525,000 in a city of Athens bond that pays 7.50 percent interest. Alternatively, Curtis could have invested the $525,000 in a bond recently issued by Initech, Incorporated that pays 9.50 percent interest with similar risk as the city of Athens bond. Assume that Curtis's marginal tax rate is 24 percent. If Curtis invested in the Initech, Incorporated bonds, what would be his after-tax rate of return from this investment?

Question

Quizplus · Accepted Answer

The before-tax return on the Initech, Incorporated bonds is 9.50 percent. After accounting for taxes, Curtis's after-tax rate of return would be:
After-tax rate of return = Before-tax rate of return x (1 - Marginal tax rate)
After-tax rate of return = 9.50% x (1 - 0.24)
After-tax rate of return = 7.22%
Therefore, Curtis's after-tax rate of return from investing in the Initech, Incorporated bonds would be 7.22 percent, which is higher than the after-tax rate of return from the city of Athens bond at 5.70 percent.

Curtis Invests $525,000 in a City of Athens Bond That