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 explicit tax would Curtis incur on interest earned on the Initech,Inc.bond?
A)$17,500
B)$5,400
C)$4,200
D)$12,600
E)None of the choices are correct.

Question

Quizplus · Accepted Answer

The interest earned on the Athens bond is:
$250,000 x 0.07 = $17,500

The interest earned on the Initech bond would be:
$250,000 x 0.09 = $22,500

Curtis's marginal tax rate is 24%, so he would owe taxes on the interest earned on the Initech bond:
$22,500 x 0.24 = $5,400

Therefore, Curtis would incur an explicit tax of $5,400 if he invested in the Initech bond.

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