a.
At 12% yield, with 40% going back to IRA, he nets 12%(1-0.4)=7.2%
b. and c
dependent on answer of a, will give you a chance to try them.
John Doe is in the 40 percent personal tax bracket. He is considering
investing in HCA bonds that carry a 12 percent interest rate.
a. What is his after-tax yield (interest rate) on the bonds?
b. Suppose Twin Cities Memorial Hospital has issued tax-exempt bonds
that have an interest rate of 6 percent. With all else the same, should
John buy the HCA or the Twin Cities bonds?
c. With all else the same, what interest rate on the tax-exempt Twin Cities bonds would make John indifferent between these bonds and
the HCA bonds?
3 answers
Sorry, meant
"going back to IRS"
"going back to IRS"
4 Jane Smith currently holds tax-exempt bonds of Good Samaritan Healthcare that pay 7 percent interest. She is in the 40 percent tax bracket. Her broker wants her to buy some Beverly Enterprises taxable bonds that will be issued next week. With all else the same, what rate must be set on the Beverly Bond to make Jane interested in making a switch?