Homework Answers
Answer :
State of New York bond has return of 5.7 percent.
Interest earned on State of New York bond is tax free.
Surething Inc. bond gives 9 percent interest and interest earned on Surething Inc. bond is taxable.
Fergie has a 30 percent marginal tax.
After tax interest on Surething Inc. bond = 9% * (1 - 30%) = 6.3%
Hence:
To make Fergie indifferent between investing in the two bonds, interest rate the state of New York bond need to offer is = 6.3%
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