Carter Corporation has some money to invest,and its treasurer is choosing between City of Chicago municipal bonds and U.S.Treasury bonds.Both have the same maturity,and they are equally risky and liquid.If Treasury bonds yield 6%,and Carter's marginal income tax rate is 24.00%,what yield on the Chicago municipal bonds would make Carter's treasurer indifferent between the two?

Question

Quizplus · Accepted Answer

Since Carter Corporation's marginal income tax rate is 24%, they will have to pay taxes on any interest income earned from the U.S. Treasury bonds. Therefore, the after-tax yield on the Treasury bonds would be (1-0.24) * 6% = 4.56%.

To make Carter's treasurer indifferent between the two options, the yield on the Chicago municipal bonds should be equal to the after-tax yield on the Treasury bonds, which is 4.56%. Therefore, the correct answer is C) 4.56%.

Carter Corporation Has Some Money to Invest,and Its Treasurer Is