Question

Melinda invests $200,000 in a city of heflin bond that pays 6 percent interest. alternatively, melinda could have invested the $200,000 in a bond recently issued by surething inc., that pays 8 percent interest and has risk and other nontax characteristics similar to the city of heflin bond. assume melinda's marginal tax rate is 25 percent. (leave no cells blank - be sure to enter "0" wherever required.) required: what is her after-tax rate of return for the city of heflin bond

Answer 1

Melinda’s after-tax rate of return on the bond is equal to its pretax rate of return (6 percent) because the City of Heflin bond is a tax-exempt bond.

The tax-exempt bond is issued by state or local government and is usually exempt from federal income taxes, and occasionally from state and local taxes too.