Jackson has the choice to invest in city of Mitchell bonds or Sundial, Inc. corporate bonds that pay 10 percent interest. Jackson is a single taxpayer who earns $55,000 annually. Assume that the city of Mitchell bonds and the Sundial, Inc. bonds have similar risk. What interest rate would the city of Mitchell have to pay in order to make Jackson indifferent between investing in the city of Mitchell and the Sundial, Inc. bonds for 2019?

Question

Lance Lucero

Business

4 October, 14:42

Jackson has the choice to invest in city of Mitchell bonds or Sundial, Inc. corporate bonds that pay 10 percent interest. Jackson is a single taxpayer who earns $55,000 annually. Assume that the city of Mitchell bonds and the Sundial, Inc. bonds have similar risk. What interest rate would the city of Mitchell have to pay in order to make Jackson indifferent between investing in the city of Mitchell and the Sundial, Inc. bonds for 2019?

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Answers (1)

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Alissa Li · Answer 1

the Mitchell and the Sundial, Inc. should have a rate of 12.82%

Explanation:

a taxperson which the income of Mr. Jackson will be subject to a 22% tax rate

22% from $39,476 to $84,200

the bonds will be taxes at 22%

and we are asked at which rate they yield a 10% after tax

pre-tax x (1-t) = after-tax

pre-tax x (1-0.22) = 0.1

0.1/0.78 = pre-tax = 0.1282051