Question

curtis invests $800,000 in a city of Athens bond that pays 10.00 percent interest. Alternatively, Curtis could have invested the $800,000 in a bond recently issued by Initech, Incorporated that pays 12.50 percent interest with similar risk as the city of Athens bond. Assume that Curtis's marginal tax rate is 24 percent. If Curtis invested in the Initech, Incorporated bonds, what would be his after-tax rate of return from this investment

Answer 1

9.5%

Step-by-step explanation:

The computation of the after tax rate of return is shown below:

But before that first determine the following calculations

The interest income earned

= $800,000 × 12.50%

= $100,000

Now After tax interest income is

= $100,000 × (1 - 0.24)

= $76,000

Now

After tax rate of return on investment is

= ($76,000 ÷ $800,000) × 100

= 9.5%