Jane Smith currently holds tax-exempt bonds of Good Samaritan Health care that pay 7% interest. She is in the 40% tax bracket. Her broker wants her to buy some Beverly Enterprise taxable bonds that will be issued next week. With all else the same, what rate must be set on the Beverly bonds to make Jane interested in making a switch?

CHAPTER 2 HOMEWORK HINTS 2.4 Note that Jane is earning 7% tax free, since they are tax exempt bonds. So if she invests in taxable bonds, she will need to earn even more interest investing in taxable bonds. To determine how much she must earn, if: RBT = before tax rate, RAT = after tax rate, and T = tax rate: RAT = RBT + (RBT - T), and by simplifying: RAT = RBT x (1 - T) Also note that by rearranging: RBT = RAT/(1 - T), and note that as long as T > 0, RAT