Mr.Gordon,a resident of Pennsylvania,paid $20,000 for a bond issued by Delaware.This year,he received $800 of interest on the bond.His marginal state tax rate is 7%,and under Pennsylvania law,interest on debt obligations issued by another state is taxable.Mr.Gordon can deduct state income tax on his federal return,and his marginal federal tax rate is 35%.Compute his after-tax rate of return on the bond.

Question

Quizplus · Accepted Answer

The after-tax rate of return is the interest received minus the taxes paid on the interest, divided by the cost of the bond. In this case, the interest received is $800, the state income tax paid is $800 * 7% = $56, and the federal income tax paid is ($800 - $56) * 35% = $268.80. Therefore, the after-tax rate of return is ($800 - $56 - $268.80) / $20,000 = 3.82%.

MrGordon,a Resident of Pennsylvania,paid $20,000 for a Bond Issued by Delaware.This