Q1: Chuck, a single taxpayer, earns $65,000 in taxable income and $10,000 in interest from an investment in City of Heflin bonds.

1. Using the U.S. tax rate schedule, how much federal tax will he owe?

2. What is his average tax rate? (Carry your answer two decimals, i.e., 20.05)

3. What is his effective tax rate?

4. What is his current marginal tax rate?

5. If Chuck earns an additional $40,000 of taxable income, what is his marginal tax rate on this income?

6. If Chuck claims an additional $40,000 of deductions, what is his marginal tax rate on this income?

Q2: Jorge and Anita, married taxpayers, earn $140,000 in taxable income and $40,000 in interest from an investment in City of Heflin bonds.

1. Using the U.S. tax rate schedule for married filing jointly, how much federal tax will they owe?

Q3: Melinda invests $100,000 in a City of Heflin bond that pays 6.4 percent interest. Alternatively, Melinda could have invested the $100,000 in a bond recently issued by Surething, Inc. that pays 8 percent interest with similar risk and other nontax characteristics to the City of Heflin bond. Assume Melindas marginal tax rate is 20 percent.

1. What is her after-tax rate of return for the City of Heflin bond?

2. How much implicit tax does she pay on the City of Heflin bond?

3. How much explicit tax would she have paid on the Surething, Inc. bond?

4. What is her after-tax rate of return on the Surething, Inc. bond?

Q4: Hugh has the choice between investing in a City of Heflin bond at 6 percent or a Surething bond. Assuming that both bonds have the same nontax characteristics and that Hugh has a 35 percent marginal tax rate.

1. What interest rate does Surething, Inc. need to offer to make Hugh indifferent between investing in the two bonds?