Question

Dana intends to invest $46,000 in either a Treasury bond or a corporate bond. The Treasury bond yields 5 percent before tax and the corporate bond yields 6 percent before tax.

a-1. Assuming Dana’s federal marginal rate is 24 percent and her marginal state rate is 5 percent, which of the two options should she choose? Assume that Dana itemizes deductions.

    

• Corporate bond

• Treasury bond

a-2. How much interest after-tax would Dana earn by investing in the corporate bond?  (Do not round intermediate calculations and round your final answer to the nearest whole dollar amount.)

    

b-1. If she were to move to another state where her marginal state rate would be 10 percent, which of the two options should she choose? Assume that Dana itemizes deductions.

    

• Corporate bond

• Treasury bond

b-2. How much interest after-tax would Dana earn by investing in the corporate bond as per requirement b-1? (Do not round intermediate calculations and round your final answer to the nearest whole dollar amount.)

    

Answer 1

A 1 and A2:

	Treasury bond	corporate bond
After - tax rate of return	(0.05) × (1-0.24)	0.06 × [1- 0.24 - 0.05(1-0.24)]
	0.038	0.04332
Interest	$46000 × 0.038	$46000 × 0.04332
	$1748	$1992.72

The amount of interest yield on corporate bond is more. Therefore dana should choose corporate bond.

.

B1 and B2;

	Treasury bond	corporate bond
After-tax rate of return	0.05 × (1.0.24)	0.06 × [1-0.24 - 0.1(1-0.24)]
	0.038	0.04104
Interest	$46000 × 0.038	$46000 × 0.04104
	$1748	$1887.84

The amount of interest yield on corporate bond is more. Therefore Dana should choose corporate bond.

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