Question

Curtis invests $250,000 in a city of Athens bond that pays 7 percent interest. Alternatively, Curtis could have invested the $250,000 in a bond recently issued by Initech, Inc. that pays 9 percent interest with similar risk as the city of Athens bond. Assume that Curtis's marginal tax rate is 24 percent. What is Curtis's after-tax rate of return on the city of Athens bond

Answer 1

7%

Step-by-step explanation:

Municipal bonds (includes both state, county and city bonds) are not subject to federal income taxes, so the after tax rate of return on the city of Athens bond is the same as its coupon rate ⇒ 7%.

In a matter of reciprocity, US securities (federal government) are not subject to state or local taxes.

Answer 2

7%

Step-by-step explanation:

Interest income if Curtis invested

250,000 x 9% = 22,500

After tax interest income = 22,500 - (22,500 x 24%)

= 17,100

After tax rate of return = 17,100/250000

0.068

Approximately 7%