Melinda invests $200,000 in a City of Heflin bond that pays 6 percent interest. Alternatively, Melinda could have invested the $200,000 in a bond recently issued by Surething Incorporated that pays 8 percent interest and has risk and other nontax characteristics similar to the City of Heflin bond. Assume Melinda’s marginal tax rate is 25 percent. How much explicit tax would she have paid on the Surething Incorporated bond? What is her after-tax rate of return on the Surething Incorporated bond?
Melinda invests $200,000 in a City of Heflin bond that pays 6 percent interest. Alternatively, Melinda could have invested the $200,000 in a bond recently issued by Surething Incorporated that pays 8 percent interest and has risk and other nontax characteristics similar to the City of Heflin bond. Assume Melinda’s marginal tax rate is 25 percent. How much explicit tax would she have paid on the Surething Incorporated bond? What is her after-tax rate of return on the Surething Incorporated bond?
Chapter1: Federal Income Taxation—an Overview
Section: Chapter Questions
Problem 63P
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Melinda invests $200,000 in a City of Heflin bond that pays 6 percent interest. Alternatively, Melinda could have invested the $200,000 in a bond recently issued by Surething Incorporated that pays 8 percent interest and has risk and other nontax characteristics similar to the City of Heflin bond. Assume Melinda’s marginal tax rate is 25 percent.
- How much explicit tax would she have paid on the Surething Incorporated bond?
- What is her after-tax
rate of return on the Surething Incorporated bond?
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