Question
James invests $100,000 in a city of Athens bond that pays 8% interest. Alternatively, James could have invested the $100,000 in a bond recently issued
James invests $100,000 in a city of Athens bond that pays 8% interest. Alternatively, James could have invested the $100,000 in a bond recently issued by HighTech, Inc. that pays 10% interest with similar risk as the city of Athens bond. Assume that Jamess marginal tax rate is 25%. Which bond should James should choose and why?
((Multiple Choice))
The HighTech, Inc. bond because it earns a higher after-tax rate of return.
The city of Athens bond because it earns a higher pre-tax rate of return.
James should be indifferent between the two bonds.
The city of Athens bond because it earns a higher after-tax rate of return.
The HighTech, Inc. bond because it earns a higher pre-tax rate of return.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started