Assume the original facts as given except that Jackson is a head of household taxpayer and the city of Mitchell pays interest of 7.8%. How would you advise Jackson to invest his money?
A) Invest in Sundial, Inc. bonds because their explicit tax is greater than the implicit tax on city of Mitchell bonds.
B) Invest in city of Mitchell bonds because their implicit tax is greater than the explicit tax on Sundial, Inc. bonds.
C) Invest in Sundial, Inc. bonds because their explicit tax is less than the implicit tax on city of Mitchell bonds.
D) Invest in city of Mitchell bonds because their implicit tax is less than the explicit tax on Sundial, Inc. bonds.
E) None of these.

Question

Quizplus · Accepted Answer

Since Jackson is a head of household taxpayer, he will receive a tax benefit from the interest paid on municipal bonds. Also, the 7.8% interest rate offered by Mitchell is higher than the interest rate offered by Sundial, Inc. Therefore, investing in city of Mitchell bonds would provide Jackson with a higher after-tax return, making it a better choice for him.

Assume the Original Facts as Given Except That Jackson Is