Question

Dana intends to invest $66,000 in either a treasury bond or a corporate bond. The Treasury Bond yields 5 percent before tax and the corporate bond yields 6 percent before tax.

A) Assuming dana's federal marginal rate is 24 percent and her marginal state rate is 5 percent, which of the two options should she choose? Assume the Dana itemizes deductions

Corporate bonds

Treasury Bonds

A2) How much interest after-tax would Dana earn by investing in the corporate bond?

B) if she were to move to another state were her marginal state rate would be 10 percent, which of the two options should she choose? Assume that Dana itemizes deductions

Corporate Bonds

Treasury Bond

B2) how much interest after-tax would Dana earn by investing in the corporate bond as per requirement B)?

Answer 1

A1 & A2
	Treasury Bonds	Corporate Bonds
After-tax rate of return	0.05*(1-0.24)	0.06*(1-0.24-0.05*(1-0.24))
	0.038	0.04332
Interest	66000*0.038	66000*0.04332
	$         2,508.00	$                               2,859.12
The amount of interest yield on corporate bonds is more. Dana should choose corporate bonds
B1 & B2
	Treasury Bonds	Corporate Bonds
After-tax rate of return	0.05*(1-0.24)	0.06*(1-0.24-0.10*(1-0.24))
	0.038	0.04104
Interest	66000*0.038	66000*0.04104
	$         2,508.00	$                               2,708.64
The amount of interest yield on corporate bonds is more. Dana should choose corporate bonds