Question

35. Emily is in the 35% marginal tax bracket. She can purchase a York County school bond yielding 3.5% interest, which is not subject to a 5% state tax. But she is interested in earning a higher return for comparable risk. Which of the following is correct: a. If she buys a corporate bond that pays 6% interest, her after-tax rate of return will be less than if she had purchased the York County school bond. b. If she buys a U.S. government bond paying 5 % , her after-tax rate of return will be less than if she had purchased the York County school bond. c. If she buys a common stock paying a 4% dividend, her after-tax rate of return will be higher than if she had purchased the York County school bond. d. All of these are correct. e. None of these is correct.

Answer 1

please find below the solution.. let me know if you need any clarification..

correct answer is option : b. If she buys a U.S. government bond paying 5%, her after-tax rate of return will be less than if she purchased the York County school bond.

exp : interest on US government bond will be tax exempt therefore firm will receive 5% interest which is higher compared to 3.5% before tax. Correct answer is option b.