Question

Jackson has the choice to invest in city of Mitchell bonds or Sundial, Inc. corporate bonds that pay 5.2% interest. Jackson is a single taxpayer who earns $42,500 annually. Assume that the city of Mitchell bonds and the Sundial, Inc. bonds have similar risk.

What interest rate would the city of Mitchell have to pay in order to make Jackson indifferent between investing in the city of Mitchell and the Sundial, Inc. bonds for year 2018? (Use tax rate schedule)

rev: 10_10_2018_QC_CS-141858

Multiple Choice

• 4.06%

• 5.20%

• 4.26%

• 3.46%

• None of the choices are correct.

2018 Tax Rate Schedules Individuals Schedule X-Single Schedule Z-Head of Household If taxable income But not over: The tax is: Ifgaxable income is But not over: The tax is: is over: over: S 9,525 10% of taxable income $ 13,600 10% of taxable income S 38,700 %24 9,525 S952.50 plus 12% of S 13.600 S 51,800 S1,360 plus 12% of the excess over $9,525 the excess over S13,600 $ 38,700 S 82,500 $4453.50 plus 22% of S 51.800 S $2.500 S5.944 plus 22% of the excess over the excess over $38,700 $51,300 S $2,500 S157,500 $ 32,500 S12,698 plus 24% of $14,039.50 plus 24% S157,500 of the excess over the excess over $82.500 $82,500 $157,500 $200,000 $32,039.50 plus 32% $30,698 plus 32% of S157,500 $200,000 of the excess over the excess over SI57,500 S157,500 $200,000 $500,000 $45,639.50 plus 35% $44,298 plus 35% of $200.000 $500,000 of the excess over the excess over $200,000 $200,000 $500,000 $150,689.50 plus 37% $149,298 plus 37% of S500,000

Answer 1

Answer-Jackson's Marginal Tax Rate= 22% as he is single taxpayer who earns $42,500 annually.

After-tax rate of return for Sundial, Inc. bonds = 5.2%*(1-0.22) = 4.056 or 4.06

Cty of Mitchell muct pay 4.06% in order to make Jackson indifferent between investing in both bonds

Hence, the correct option is a)-4.06%

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