Question

Henry is an investor who buys a high yield corporate bond. He earns a before-tax yield of 12.00 percent and an after-tax yield of 9.40 percent. What is Henry’s marginal tax rate as a percent to two decimal places? Explain your answer.

Answer 1

Henry's marginal tax rate is 21.67%.

Step-by-step explanation:

Henry's before-tax yield on the high yield corporate bond is 12.00%, and the after-tax yield is 9.40%. The difference between these two yields represents the tax savings Henry enjoys.

To calculate the tax savings, subtract the after-tax yield from the before-tax yield:

\[ 12.00\% - 9.40\% = 2.60\% \]

This 2.60% represents the portion of the yield that Henry retains after accounting for taxes. To find the percentage of his original income that this represents, divide the tax savings by the before-tax yield:

\[ \frac{2.60\%}{12.00\%} \approx 0.2167 \]

Multiplying by 100 to convert to a percentage, Henry's marginal tax rate is approximately 21.67%.

In summary, Henry's marginal tax rate is the percentage of his income that he saves from taxes, and in this case, it amounts to 21.67%. This calculation allows investors like Henry to assess the impact of taxes on their investment returns and make more informed financial decisions.