Suppose a foreign investor who holds tax-exempt Eurobonds paying 9% is considering investing in an equivalent-risk domestic bond in a country with a 28% withholding tax on interest paid to foreigners.If 9% after-tax is the investor's required return, what before-tax rate would the domestic bond need to pay to provide the required after-tax return?

Question

Quizplus · Accepted Answer

Gross up the interest rate on the domestic bond:
rd?p??t??? = 0.09/(1 - 0.28)= 12.5%.Solution check:
After-tax return: 12.5% - 0.28(12.5%)= 12.5% - 3.5% = 9.0%.

Suppose a Foreign Investor Who Holds Tax-Exempt Eurobonds Paying 9