Question

Assume an investor-owned (for-profit) hospital must offer a 9 percent interest rate on its new bonds. John Smith, an individual investor with a 27 percent tax rate, buys one $1,000 bond. What is the effective (after-tax) annual interest? Round your final answer to the nearest dollar amount. Omit the " $ " sign and commas in your response. For example, $1,234 should be entered as 1234.

Answer 1

The effective annual interest that John Smith would receive from the $1,000 bond with a 9% interest rate, considering his 27% tax bracket, is $66 after rounding to the nearest dollar.

Step-by-step explanation:

When interest rates rise, the price of existing bonds falls. This is because new bonds will offer higher interest rates, making the existing bonds less attractive to investors. In the given scenario, the interest rate on the bond is 6% and the current interest rate is 9%. Since the current interest rate is higher than the bond's interest rate, the bond's price would be expected to be less than its face value of $10,000.

The student has asked to calculate the effective annual interest received by an individual investor from a hospital bond with a 9% interest rate, taking into account the investor's 27% tax rate. To find the after-tax interest, we first calculate the annual interest paid on the bond, which is 9% of $1,000, equalling $90. Next, we adjust this amount for taxes by subtracting 27% of the interest, which is $90 x 0.27 = $24.30. The after-tax interest is then $90 - $24.30 = $65.70. When rounding to the nearest dollar, the effective annual interest would be $66.