Question

Hugh has the choice between Investing in a City of Heflin bond at 3.30 percent or Investing in a Surething bond at 5.15 percent. Assuming that both bonds have the same nontax characteristics and that Hugh has a 40 percent marginal tax rate, what Interest rate does Surething Inc., need to offer to make Hugh Indifferent between Investing in the two bonds? (Round your answer to 2 decimal places.) Interest rate D

Answer 1

calculation of interest rate

after tax return = pretax return *(1-tax rate )

let pretax return be X

0.033 = X*(1-0.40)

X= 0.033/0.60 = 0.055

X = 5.5%

Interest rate = 5.5%