Curtis invests 475000 in a city of Athens bond that pays 675

Curtis invests $475,000 in a city of Athens bond that pays 6.75% interest. Alternatively, Curtis could have invested the $475,000 in a bond recently issued by Initech, Inc. that pays 8.25% interest with similar risk as the city of Athens bond. Assume that Curtis\'s marginal tax rate is 28%.

What is Curtis\'s after-tax rate of return on the city of Athens bond?

Multiple Choice

1.89%

None of the choices are correct.

8.25%

6.75%

2.31%

Solution

After tax rate of return on the city of Athens bond would be the same as the before tax rate of return unlike the bonds that could be invested in.

Hence after-tax rate of return=6.75%

Hence the correct option is D.