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

Question

Business

Madilyn

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

+4

Answers (1)

Know the Answer?

Gretchen Guerrero · Answer 1

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%

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

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