Question

To discover the marginal tax rate at which the neighbors would be indifferent between investing in either type of bond, solve the following equation for t: 5 percent x (1-t) = 3.5 percent. It turns out that t equals 30 percent. In other words, the after-tax rates of return for both bonds are equal if the Johnsons have a marginal tax rate of 30 percent. What is the marginal tax rate at which the neighbors would be indifferent between investing in either type of bond?

Answer 1

To find the marginal tax rate at which the neighbors would be indifferent between investing in either type of bond, we need to solve the equation 5 percent x (1-t) = 3.5 percent for t. The solution is t = 0.93, or 93%.

Step-by-step explanation:

To find the marginal tax rate at which the neighbors would be indifferent between investing in either type of bond, we need to solve the equation 5 percent x (1-t) = 3.5 percent for t. Rearranging the equation, we have 0.05(1 - t) = 0.035. Dividing both sides by 0.05, we get 1 - t = 0.07. Subtracting 1 from both sides, we have -t = -0.93. Finally, dividing both sides by -1, we find that t = 0.93, or 93%. Therefore, the marginal tax rate at which the neighbors would be indifferent between investing in either type of bond is 93%.