Question

Hugh has the choice between investing in a City of Heflin bond at 4.80 percent or investing in a Surething Inc. bond at 7.25 percent. Assuming that both bonds have the same nontax characteristics and that Hugh has a 40 percent marginal tax rate, what interest rate does Surething Inc. need to offer to make Hugh indifferent between investing in the two bonds

Answer 1

8%

Step-by-step explanation:

Calculation for what interest rate does Surething Inc. need to offer to make Hugh indifferent between investing in the two bonds

Using this formula

Interest rate=City of Heflin bond Percentage rate/(1 − Marginal tax rate)

Let plug in the formula

Interest rate=4.80% / (1 − 40%)

Interest rate=4.80%/60%

Interest rate= 8%

Therefore the interest rate that Surething Inc. need to offer to make Hugh indifferent between investing in the two bonds will be 8%