Question

1. Curtis invests $825,000 in a city of Athens bond that pays 10.25 percent interest. Alternatively, Curtis could have invested the $825,000 in a bond recently issued by Initech, Inc. that pays 13.00 percent interest with similar risk as the city of Athens bond. Assume that Curtis's marginal tax rate is 24 percent.

How much explicit tax would Curtis incur on interest earned on the Initech, Inc. bond?

Multiple Choice

• $81,910

• $25,740

• $20,295

• $63,567.5

• None of the choices are correct

2. Jackson has the choice to invest in city of Mitchell bonds or Sundial, Inc. corporate bonds that pay 8.8 percent interest. Jackson is a single taxpayer who earns $68,000 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 2019? (Use tax rate schedule)

Multiple Choice

• 6.86 percent

• 8.80 percent

• 7.06 percent

• 6.26 percent

• None of the choices are correct

Answer 1

1. explicit tax is tax actually paid.

=interest income * tax rate

825000*13% * tax rate

=107250*24%

=25740$