Question

Mr. Wolfe has $100,000 to invest. He could buy corporate bonds with an 8% rate of return or municipal bonds with a 6% rate of return. If Mr. Wolfe invests in the municipal bonds, his implicit tax is $.

Answer 1

The implicit tax that Mr. Wolfe would face by investing in municipal bonds instead of corporate bonds with a higher interest rate would be $2,000, calculated as the difference in earned interest between an 8% and a 6% annual return on a $100,000 investment.

Step-by-step explanation:

If Mr. Wolfe invests in municipal bonds at a 6% rate of return instead of corporate bonds at an 8% rate of return, he is effectively earning less money on his investment due to the lower interest rate. To calculate his implicit tax, we need to determine the difference in interest he would have received from the corporate bonds versus the municipal bonds. The interest from the corporate bonds would be 8% of $100,000, which is $8,000, while the interest from the municipal bonds would be 6% of $100,000, which is $6,000. The implicit tax is the difference between these two amounts.

The implicit tax would therefore be $8,000 - $6,000 = $2,000.