Personal Finance, Student Value Edition Plus MyLab Finance with Pearson eText -- Access Card Package (6th Edition)
6th Edition
ISBN: 9780134426839
Author: Jeff Madura
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Question
Chapter 16, Problem 2FPP
Summary Introduction
To determine: The investment which gives high annual interest after considering the taxes.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Stacey faces a 15% tax rate on interest income. She can buy a $100 face value corporate bond yielding 12.5% ($12.5) annually for $100 or a municipal bond yielding $12.5 annually. Both bond issues have similar maturities and risk. How much is she willing to pay for the municipal bond?
David has the option to invest in one of the following
Town of Elmdale bond that pays 6% interest annually
Town of Schitt's Creek bond that pays 6.5% interest annually
Prada corporate bond that pays 7% interest annually
Gucci corporate bond that pays 6% interest annually
David anticipates that his marginal rate will be 10%. Which investment should he choose from tax perspective?
a.Group of answer choices
b.Prada bond
c.Elmdale bond
d.Schitt's Creek bond
e. Gucci bond
You decide to invest $27,000 in a municipal bond that earns 6.15% and is federally tax free. Your tax rate is 28%,
how much have you effectively earned after ten years, assuming annual compounding? (Hint: must use two formulas
to solve this question) In other words, because you are not paying taxes how much have you effectively earnedk,
Chapter 16 Solutions
Personal Finance, Student Value Edition Plus MyLab Finance with Pearson eText -- Access Card Package (6th Edition)
Ch. 16 - Prob. 1RQCh. 16 - Prob. 2RQCh. 16 - Prob. 3RQCh. 16 - Prob. 4RQCh. 16 - Prob. 5RQCh. 16 - Prob. 6RQCh. 16 - Prob. 7RQCh. 16 - Prob. 8RQCh. 16 - Corporate Bonds. What are corporate bonds? Are...Ch. 16 - Prob. 10RQ
Ch. 16 - Prob. 11RQCh. 16 - Prob. 12RQCh. 16 - Prob. 13RQCh. 16 - Prob. 14RQCh. 16 - Prob. 15RQCh. 16 - Prob. 16RQCh. 16 - Prob. 17RQCh. 16 - Prob. 18RQCh. 16 - Maturity Matching. Describe the maturity matching...Ch. 16 - Bond value. How is the value of a bond determined?...Ch. 16 - Prob. 21RQCh. 16 - Prob. 22RQCh. 16 - Prob. 23RQCh. 16 - Prob. 24RQCh. 16 - Prob. 25RQCh. 16 - Bond Values. Describe the process of valuing a...Ch. 16 - Prob. 27RQCh. 16 - Prob. 28RQCh. 16 - Bond Payments. Bernie purchased 20 bonds with par...Ch. 16 - Prob. 2FPPCh. 16 - Prob. 3FPPCh. 16 - Tax Consequences. Katie paid 9,400 for a Ginnie...Ch. 16 - Return on Bonds. Timothy has an opportunity to buy...Ch. 16 - Bond Valuation. Mia wants to invest in Treasury...Ch. 16 - Bond Valuation. Emma is considering purchasing...Ch. 16 - Bond Valuation. Mark has a Treasury bond with a...Ch. 16 - Prob. 9FPPCh. 16 - Risk Premium. Sandy has a choice between...Ch. 16 - Prob. 1FPOECh. 16 - Prob. 1PPF
Knowledge Booster
Similar questions
- Candy has $70,000 to invest and wants an annual return of $2800, which requires an overall rate of return of 4%. She can invest in a safe, government-insured certificate of deposit, but it pays only 2%. To obtain 4%, she agrees to invest some of her money in noninsured corporate bonds paying 7%. How much should be placed in each investment to achieve her goal?arrow_forwardHui is currently considering investing in municipal bonds that earn 8.40 percent interest, or in taxable bonds issued by the Coca- Cola Company that pay 11.00 percent. Required: If Hui's tax rate is 22 percent, which bond should he choose? Which bond should he choose if his tax rate is 32 percent? At what tax rate would he be indifferent between the bonds? What strategy is this decision based upon?arrow_forwardAnne's marginal income tax rate is 32 percent. She purchases a corporate bond for $10,000 and the maturity. or face value, of the bond is $10,000. If the bond pays 5 percent per year before taxes, what is Anne's annual after-tax rate of return from the bond if the bond matures in 1 year? What is her annual after-tax rate of return if the bond matures in 10 years? NOTE: Round your answers to 1 decimal place. AFTER-TAX RATE: a) Bond matures in 1 year: ___________% b) Bond matures in 10 years: ____________%arrow_forward
- 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 Inc. 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. a) What is her after-tax rate of return for the City of Heflin bond? b) How much explicit tax does Melinda pay on the City of Heflin bond? c) How much implicit tax does she pay on the City Heflin bond? d) How much explicit tax would she have paid on the Surething, Inc. bond? e) What is her after-tax rate of return on the Surething Inc. bond?arrow_forwardSteven is looking to invest his excess money of $430,000 in an opportunity that will provide the best overall net cash flow. If he invests in Wildhorse County bonds, they will generate 3% interest annually. If he invests in Wildhorse Manufacturing Company bonds, they will generate 4.25% interest annually. Steven is currently in a 32% tax bracket. Which investment will provide his best overall net cash flow? Net cash flow $ Wildhorse County Bond Wildhorse Manufacturing Co. $ investment will provide best overall net cash flow.arrow_forwardAnswer each of the following independent questions. Ignore personal income taxes. Use Appendix A for your reference. (Use appropriate factor(s) from the tables provided.) Required: 1. Suppose you invest $4,100 in an account bearing interest at the rate of 10 percent per year. What will be the future value of your investment in five years? 2. Your best friend won the state lottery and has offered to give you $11,600 in four years, after he has made his first million dollars. You figure that if you had the money today, you could invest it at 8 percent annual interest. What is the present value of your friend’s future gift? 3. In four years, you would like to buy a small cabin in the mountains. You estimate that the property will cost you $68,500 when you are ready to buy. How much money would you need to invest each year in an account bearing interest at the rate of 4 percent per year in order to accumulate the $68,500 purchase price? 4. You have estimated that your educational expenses…arrow_forward
- You have $10,000 cash that you want to invest. Normally, you would deposit the money in a savings account that pays an annual interest rate of 6%. However, you are now considering the possibility of investing in a bond. Your alternatives are either a nontaxable municipal bond paying 9% or a taxable corporate bond paying 12%. Your marginal tax rate is 30% for both ordinary income and capital gains. (The marginal tax rate of 30% means that you will keep only 70% of your bond interest income.) You expect the general inflation rate to be 3% during the investment period. You can buy a high-grade municipal bond costing $10,000 that pays interest of 9% ($900) per year. This interest is not taxable. A comparable high-grade corporate bond for the same price is also available. This bond is just as safe as the municipal bond but pays an interest rate of 12% ($1,200) per year. The interest for this bond is taxable as ordinary income. Both bonds mature at the end of year 5.(a) Determine the real…arrow_forwardMatt recently deposited $41,250 in a savings account paying a guaranteed interest rate of 2.6 percent for the next 10 years. If Matt expects his marginal tax rate to be 22.00 percent for the next 10 years, how much interest will he earn after-tax for the first year of his investment? How much interest will he earn after-tax for the second year of his investment if he withdraws enough cash every year to pay the tax on the interest he earns? How much will he have in the account after 4 years? How much will he have in the account after 7 years?arrow_forwardJoan purchases a 30-year federal government bond for $10,000 that pays 4 percent annual interest. Jim purchases $20,000 worth of 30-year corporate bonds that pay 7 percent annual interest. Joan’s goal is to earn $400 per year on her investment, and Jim’s goal is to earn $1,400 per year on his investment. Is Joan or Jim more efficient? Why? Is Joan or Jim more effective? Why?arrow_forward
- Hui is currently considering investing in municipal bonds that earn 8.55 percent interest, or in taxable bonds issued by the Coca-Cola Company that pay 11.40 percent. Required: If Hui's tax rate is 22 percent, which bond should he choose? Which bond should he choose if his tax rate is 32 percent? At what tax rate would he be indifferent between the bonds? What strategy is this decision based upon?arrow_forwardSuppose you return to college and earn an MBA, after which you get a middle-management position with General Mills, the firm that makes Lucky Charms and other breakfast cereals. If the tax rates are the same as in 2018 and your starting salary is $90,000, how much will General Mills pay on your behalf in federal social insurance taxes? between $7,000 and $8,000 less than $7,000 O between $9,000 and $10,000 between $8,000 and $9,000 more than $10,000arrow_forwardDavid Abbot is buying a new house, and he is taking out a 30-year mortgage. David will borrow $201,000 from a bank, and to repay the loan he will make 360 monthly payments (principal and interest) of $1,158.97 per month over the next 30years. David can deduct interest payments on his mortgage from his taxable income, and based on his income, David is in the 32% tax bracket. a. What is the before-tax interest rate (per year) on David's loan? b. What is the after-tax interest rate that David is paying?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
