Suppose a foreign investor who holds tax-exempt Eurobonds paying 10.50% is considering investing in an equivalent-risk domestic bond in a country with a 28% withholding tax on interest paid to foreigners. If 10.50% after-tax is the investor's required return, what before-tax rate would the domestic bond need to pay to provide the required after-tax return? 15.46% 16.33% 16.92% 12.83% 14.58%

Question

Lucille Tate

Business

28 February, 06:01

Suppose a foreign investor who holds tax-exempt Eurobonds paying 10.50% is considering investing in an equivalent-risk domestic bond in a country with a 28% withholding tax on interest paid to foreigners. If 10.50% after-tax is the investor's required return, what before-tax rate would the domestic bond need to pay to provide the required after-tax return? 15.46% 16.33% 16.92% 12.83% 14.58%

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Karter Wade · Answer 1

14.58%

Explanation:

Return on Bond is the actual rate that is received by an investor on investment in bond.

As per given data

After Tax return = 10.50%

Tax Rate = 28%

Deduction of 28% withholding tax will be made on the return of the bond in that country where investment is made and investor will have return net of tax.

We can calculate the after tax return on the bond as follow

After tax return = Before tax return x (1 - Tax rate)

10.5% = Before tax return x (1 - 28%)

0.105 = Before tax return x (1 - 0.28)

0.105 = Before tax return x 0.72

Before tax return = 0.105 / 0.72

Before tax return = 0.1458 = 14.58%