Fergie has the choice between investing in State of New York

Fergie has the choice between investing in State of New York bond at 10.2 percent and a Surething bond at 11.5 percent. Assuming that both bonds have the same nontax characteristics and that Fergie has a 30 percent marginal tax rate, in which bond should she invest?

Solution

After tax rate of return for Surething bond =11.5(1-0.3)=8.05%

Hence since State of New York bond has a higher rate of return;State of New York bond bond must be invested upon.