Hugh has the choice between investing in a City of Heflin bo

Hugh has the choice between investing in a City of Heflin bond at 6.45 percent investing in a Surething bond at 10.40 percent. Assuming that both bonds have the same nontax characteristics and that Hugh has a 40 percent marginal tax rate, what interest rate does Surething Inc., need to offer to make Hugh indifferent between investing in the two bonds? (Round your answer to 2 decimal places.)

Hugh has the choice between investing in a City of Heflin bond at 6.45 percent investing in a Surething bond at 10.40 percent. Assuming that both bonds have the same nontax characteristics and that Hugh has a 40 percent marginal tax rate, what interest rate does Surething Inc., need to offer to make Hugh indifferent between investing in the two bonds? (Round your answer to 2 decimal places.) Answer is complete but not entirely correct nterest ate 11.000%

Solution

Yield on Surething bond(1-tax rate)=Yield on  City of Heflin bond

Interest rate(1-0.4)=6.45

Hence

Interest rate=6.45/0.6

which is equal to

=10.75%