Norma is in the 32% marginal tax bracket. Because of her high tax rate, Norma would like to reinvest a $10,000, 6%, certificate of deposit in a tax-exempt bond. What is the minimum rate of interest Norma would have to receive to make the tax exempt-bond a more profitable investment?

Question

Quizplus · Accepted Answer

To find the minimum rate of interest Norma would have to receive to make the tax-exempt bond a more profitable investment than her current 6% taxable certificate of deposit, we need to adjust the taxable interest rate to reflect the effect of taxes. The formula to find the equivalent tax-exempt yield is: Taxable Interest Rate * (1 - Marginal Tax Rate). Plugging in Norma's details, we get 6% * (1 - 0.32) = 6% * 0.68 = 4.08%. Therefore, the minimum rate of interest she would need from a tax-exempt bond to make it more profitable than her current investment is slightly more than 4.08%, which rounds to 4.1%.

Norma Is in the 32% Marginal Tax Bracket