Jackson has the choice to invest in city of Mitchell bonds o

Jackson has the choice to invest in city of Mitchell bonds or Sundial, Inc. corporate bonds that pay 10% 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 year 2017

Solution

Jackson\'s marginal tax rate is 25% After-tax rate of return for Sundial, Inc. bonds = 10%*(1-0.25) = 7.5% Cty of Mitchell muct pay 7.5% in order to make Jackson indifferent between investing in both bonds