Jack has $1,000 to invest. He has a choice between municipal bonds with an interest rate of 4% or corporate bonds with an interest rate of 6%. Jack has a marginal tax rate of 25%. Given this information, Jack should invest in the bonds. The after-tax rate of return on the municipal bonds is % and the after tax rate of return on the corporate bonds is %. The difference in the rates of return is known as taxes.

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pamateriales pamateriales · Answer 1 · 2019-09-21T21:31:54+02:00

Answer:

Ans. The after-tax rate of return on the municipal bonds is 3% and the after tax rate of return on the corporate bonds is 4.5%

Explanation:

Hi, the formula to find the after-tax rate of return of any taxable income is as follows.

[tex]r(AfterTax)=r(BeforeTax)*(1-Taxes)[/tex]

Therefore, in the case of the municipal bond.

[tex]r(AfterTax)=0.04*(1-0.25)=0.03[/tex]

So, the after-tax rate of return of the municipal bond is 3%.

And for the corporate bond is.

[tex]r(AfterTax)=0.06*(1-0.25)=0.045[/tex]

And the after-tax rate of return of the corporate bond is 4.5%.

It means that taxes on municipal bonds are:

[tex]Taxes= Return(BeforeTax)-Return(AfterTax)[/tex]

In the case of municipal taxes:

[tex]Taxes=0.04-0.03=0.01[/tex]

1% taxes for municipal bonds

In the case of corporate taxes:

[tex]Taxes=0.06-0.045=0.015[/tex]

1.5% taxes for corporate bonds

Best of luck.