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 28%. If Curtis invested in the Initech,Inc.bonds,what would be his after-tax rate of return from this investment?

Question

Quizplus · Accepted Answer

First, let's calculate the before-tax return on the Initech, Inc. bond.

9% of $250,000 = $22,500

Now, let's calculate the after-tax return.

After-tax return = before-tax return x (1 - marginal tax rate)

After-tax return = $22,500 x (1 - 0.28)

After-tax return = $22,500 x 0.72

After-tax return = $16,200

Finally, let's calculate the after-tax rate of return.

After-tax rate of return = after-tax return / original investment

After-tax rate of return = $16,200 / $250,000

After-tax rate of return = 0.0648 or 6.48%

Therefore, the best choice is C) 6.48% because it represents Curtis's after-tax rate of return from investing in the Initech, Inc. bond.

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