Final answer:
After calculating the post-tax return and using the compound interest formula, the worth of the investment after 8 years is approximately $77,495, and after 20 years, it's approximately $113,750. Option D is the correct answer.
Step-by-step explanation:
To calculate the future value of Tom's corporate bond investment after taking into account taxes, we need to adjust the return to reflect Tom's marginal tax rate of 35%. A before-tax return of 5% becomes a net post-tax return of 3.25% (5% * (1 - 0.35)). Now, to find the worth of Tom's $60,000 investment after 8 years, we use the formula for compound interest:
FV = PV * (1 + r)^t
Where:
- FV is the future value,
- PV is the present value,
- r is the annual interest rate (3.25% or 0.0325), and
- t is the number of years.
For 8 years:
FV = $60,000 * (1 + 0.0325)^8
FV ≈ $77,495.00
And for 20 years:
FV = $60,000 * (1 + 0.0325)^20
FV ≈ $113,750.00
Therefore, the closest matching option from the choices given is D. $77,495; $113,750, which represents the bond's value after 8 and 20 years, respectively.
Note: The detailed explanation of calculating the bond's price based on market interest rate changes is informative but not directly needed to answer the student's question. It provides context on how bond prices are influenced by interest rates.