Question

Assume that Marsha is indifferent between investing in a city of Destin bond that pays 3 percent Interest and a corporate bond that pays 4.5 percent interest. What is Marsha's marginal tax rate? (Do not round intermediate computations.) Multiple Choice 24.17 percent 48.33 percent Oo oo 38.33 percent 66.66 percent 12 of 20 * < Prev Next >

Answer 1

Marsha would be indifferent between the two options if the following equation is true:

Interest rate on City of Destin bond = Interest rate on Corporate bond x (1 - Tax rate)

3% = 4.5% x (1 - Tax rate)

3% / 4.5% = 1 - Tax rate

66.67% = 1 - Tax rate

Tax rate = 1 - 66.67%

Tax rate = 33.33%

Please note, the correct answer of the question is 33.33%. However, this answer is not available in the options given in the question.

I think there is some printing error in the options given in the question.

Because 38.33 percent is the closest to 33.33% please choose 38.33% as your answer.