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11 September, 03:24

Assume that John's marginal tax rate is 40%. If a city of Austin bond pays 6% interest, what interest rate would a corporate bond have to offer for John to be indifferent between the two bonds?

A. 30%

B. 10%

C. 6%

D. 3.6%

E. None of these

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Answers (1)
  1. 11 September, 03:43
    0
    B. 10%

    Explanation:

    Given that

    Tax rate = 40%

    Net tax rate = 6%

    Recall that

    Gross interest = Net of tax rate / (1 - tax rate)

    Therefore,

    = 0.06 : (1 - 0.40)

    = 0.06 : 0.60

    = 0.1

    = 10%
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