Curtis invests $800,000 in a city of Athens bond that pays 10% interest. Alternatively, Curtis could have invested the $800,000 in a bond recently issued by Initech, Inc. that pays 12.5% interest with similar risk as the city of Athens bond. Assume that Curtis's marginal tax rate is 24%. What is Curtis's after-tax rate of return on the city of Athens bond?

Answer:

To calculate Curtis's after-tax rate of return on the city of Athens bond, we need to consider his marginal tax rate.   First, let's find the annual interest earned from the bond investment. Curtis invested $800,000 in a city of Athens bond that pays 10% interest. So, the annual interest earned will be 10% of $800,000, which is $80,000.  Now, let's calculate the amount of tax Curtis needs to pay on this interest income. Given that Curtis's marginal tax rate is 24%, he will need to pay 24% of the $80,000 interest income as tax. This is calculated as 24% of $80,000, which is $19,200.  To find Curtis's after-tax rate of return, we need to subtract the tax paid from the interest earned and divide it by the initial investment. So, the after-tax rate of return on the city of Athens bond can be calculated as:  After-tax rate of return = (Interest earned - Tax paid) / Initial investment  After-tax rate of return = ($80,000 - $19,200) / $800,000  After-tax rate of return = $60,800 / $800,000  After-tax rate of return = 0.076, or 7.6%  Therefore, Curtis's after-tax rate of return on the city of Athens bond is 7.6%. This means that after paying taxes, he will earn a net return of 7.6% on his initial investment of $800,000.