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Anne's marginal income tax rate is 32 percent
Anne's marginal income tax rate is 32 percent. She purchases a corporate bond for $10,000 and the maturity, or face value, of the bond is $10,000. If the bond pays 5 percent per year before taxes, what is Anne's annual after-tax rate of return from the bond if the bond matures in 1 year? What is her annual after-tax rate of return if the bond matures in 10 years?
Bond matures in 1 year - ?
Bond matures in 10 years - ?
Expert Solution
Computation of Annual After-tax Rate of Return if the Bond matures in 1 year:
Annual After-tax Rate of Return = Before-tax Rate * (1 - Tax Rate)
= 5%*(1-32%)
= 3.40%
Computation of Annual After-tax Rate of Return if the Bond matures in 10 years:
Since there is no difference in face value ($10,000) and purchase price ($10,000), the rate of return becomes unchanged. This would be 3.40% too, although the years of maturity increase to 10.
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