Jackson has the choice to invest in city of Mitchell bonds or Sundial, Inc. corporate bonds that pay 10% interest. Jackson is a single taxpayer who earns $55,000 annually. Assume that the city of Mitchell bonds and the Sundial, Inc. bonds have similar risk. 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

Implicit tax on City of Mitchell bonds: 10% - 7.8% = 2.2%, Explicit tax on Sundial, Inc. bonds: 10% × .25 = 2.5%.

Jackson Has the Choice to Invest in City of Mitchell