Curtis invests $250,000 in a city of Athens bond that pays 7 percent interest, Alternatively, Curtis could have invested the $250,000 in a bond recently issued by Initech, Inc

Accounting Jan 21, 2021

Curtis invests $250,000 in a city of Athens bond that pays 7 percent interest, Alternatively, Curtis could have invested the $250,000 in a bond recently issued by Initech, Inc. that pays 9 percent interest with similar risk as the city of Athens bond. Assume that Curtis's marginal tax rate is 24%

If Curtis invested in the Initech, Inc. bonds, what would be his after-tax rate of return fron this investment?

a) 5.32%

b) 7%

c) 6.84%

d) 2.52%

e) none if the choices are correct

Expert Solution

The correct answer is option c - 6.84%

After tax = Pre tax * (1-Marginal tax rate)

= 9% * (1-24%)

= 9% * 0.76

= 6.84% ( Correct answer)

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