Question

Fergie has the choice between investing in a State of New York bond at 5.9 percent and a Surething Inc. bond at 9.4 percent. Assuming that both bonds have the same nontax characteristics and that Fergie has a 30 percent marginal tax rate, what interest rate does the state of New York bond need to offer to make Fergie indifferent between investing in the two bonds?

Answer 1

the interest rate that the state of New York bond need to offer to make Fergie indifferent is 6.58%

Step-by-step explanation:

After tax returning surething bond = 9.4%*(1-30) = 6.58%

when New York bond offers 6.58%,Fergie will be indifferent between investing in the two bonds

Therefore, the interest rate that the state of New York bond need to offer to make Fergie indifferent is 6.58%