Curtis invests $250,000 in a city of Athens bond that pays 7% interest.Alternatively,Curtis could have invested the $250,000 in a bond recently issued by Initech,Inc.that pays 9% interest with similar risk as the city of Athens bond.Assume that Curtis's marginal tax rate is 24%. If Curtis invested in the Initech,Inc.bonds,what would be his after-tax rate of return from this investment?
A)5.32%
B)7.00%
C)6.84%
D)2.52%
E)None of the choices are correct.

Question

Quizplus · Accepted Answer

First, let's calculate the before-tax return on the Initech bond:

$250,000 x 9% = $22,500

Now let's calculate the tax on this interest income:

$22,500 x 24% = $5,400

Subtracting the tax from the interest income, we get:

$22,500 - $5,400 = $17,100

Dividing this after-tax income by the initial investment, we get the after-tax rate of return:

$17,100 / $250,000 = 0.0684 or 6.84%

Therefore, the best choice is C) 6.84%, as Curtis would earn a higher after-tax rate of return by investing in the Initech bond rather than the city of Athens bond.

Curtis Invests $250,000 in a City of Athens Bond That