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 $50,000 annually.Assume that the city of Mitchell bonds and the Sundial,Inc.bonds have similar risk.What interest rate would the city of Mitchell have to pay in order to make Jackson indifferent between investing in the city of Mitchell and the Sundial,Inc.bonds for year 2013?
A)7.50%
B)10.00%
C)8.00%
D)7.20%
E)None of these

Question

Quizplus · Accepted Answer

The interest from city bonds is tax-exempt, while corporate bond interest is taxable. Jackson's tax rate is 22% for 2013. To find the equivalent tax-exempt rate: 10% * (1 - 0.22) = 7.8%. The closest option is 7.50%.

Jackson Has the Choice to Invest in City of Mitchell