Ask Question
11 December, 11:38

James invests $100,000 in a city of Athens bond that pays 8% interest. Alternatively, James could have invested the $100,000 in a bond recently issued by HighTech, Inc. that pays 10% interest with similar risk as the city of Athens bond. Assume that James's marginal tax rate is 25%. Which bond should James should choose and why?

+5
Answers (1)
  1. 11 December, 14:52
    0
    The James should choose city Athens bond because the amount of interest earned in city Athens bond is more.

    Explanation:

    Given:

    Amount invested by James = $100,000

    Rate of interest offered by city Athens bond = 8%

    also,

    rate of interest paid by the HighTech Inc. = 10%

    Marginal tax rate = 25%

    Now,

    The amount of interest earned from the city Athens bonds

    = Amount invested * Interest rate

    = $100,000 * 0.08

    = $8,000

    and,

    The amount of interest earned from the HighTech Inc bonds

    = Amount invested * Tax rate

    = The amount of interest earned from the city Athens bonds

    = $100,000 * 0.10

    = $10,000

    Now,

    the actual amount received after the marginal tax

    = Interest earned - Marginal tax

    = $10,000 - 0.25 * $10,000

    = $7,500

    Since,

    the amount of interest earned in city Athens bond is more

    Hence,

    The James should choose city Athens bond
Know the Answer?
Not Sure About the Answer?
Get an answer to your question ✅ “James invests $100,000 in a city of Athens bond that pays 8% interest. Alternatively, James could have invested the $100,000 in a bond ...” in 📙 Business if there is no answer or all answers are wrong, use a search bar and try to find the answer among similar questions.
Search for Other Answers