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22 November, 18:21

Jane smith currently holds tax-exempt bonds of good samaritan health care that 7% interest. she is in the 35% tax bracket. her broker wants her to buy some beverly enterprises taxable bonds that will be issued next week. with all else same, what rate must be on the beverly bonds to make jane interested in making a switch

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  1. 22 November, 18:41
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    I guess the correct answer is 11.67%

    RBT = before tax rate, RAT = after tax rate, and T = tax rate

    RBT = RAT / (1 - T) 7% / (1-.40) = 11.67%

    Beverly bonds must pay at least 11.67% interest to make Jane interested in making a switch.
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