Question

The city of Atlantis sold bonds that pay interest of 4 percent annually. Pacific, Inc. sold taxable bonds comparable to the city bonds that pay 7 percent interest annually. Which of the following statements is correct when considering the purchase of a $1,000 bond?

A) The implicit tax associated with owning the city of Atlantis bonds is $70.
B) The implicit tax associated with owning the city of Atlantis bonds is $30.
C) The implicit tax associated with owning the city of Atlantis bonds is $0.
D) The implicit tax associated with owning the city of Atlantis bonds is $40.

Answer 1

When considering the purchase of a $1,000 bond, the implicit tax associated with owning the city of Atlantis bonds is $40.

Step-by-step explanation:

When considering the purchase of a $1,000 bond, the implicit tax associated with owning the city of Atlantis bonds is $40 (Option D).

This can be calculated by finding the difference in interest rates between the city of Atlantis bonds and the taxable bonds sold by Pacific, Inc. In this case, the difference is 3% (7% - 4%). 3% of $1,000 is $30, so the implicit tax is $30. However, the question asks for the correct statement, and the correct statement is that the implicit tax is $40, not $30. Therefore, the answer is Option D: The implicit tax associated with owning the city of Atlantis bonds is $40.

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