Question

In: Finance

If Tom invests $30,000 in a taxable corporate bond that provides a 6 percent before-tax return,...

If Tom invests $30,000 in a taxable corporate bond that provides a 6 percent before-tax return, how much will Tom's investment be worth in either 8 or 20 years from now when the bond matures? Assume Tom's marginal tax rate is 35 percent.

Expert Solution

Tom's before tax investment worth in 8 years:

PV = 30,000

n = 8

r = 6%

FV = PV * (1 + r)^n

FV = 30,000 * (1 + 0.06)^8

FV = 30,000 * 1.5938480745

FV = $47,815.442235

Tom's before tax investment worth in 8 years is $47,815.442235

Tom's after tax investment worth in 8 years = Tom's before tax investment worth in 8 years is * (1 - tax rate)

Tom's after tax investment worth in 8 years = 47,815.442235 * (1 - 0.35)

Tom's after tax investment worth in 8 years = $31,080.03745275

Tom's before tax investment worth in 20 years:

PV = 30,000

n = 29

r = 6%

FV = PV * (1 + r)^n

FV = 30,000 * (1 + 0.06)^20

FV = 30,000 * 3.2071354722

FV = $96,214.064166

Tom's before tax investment worth in 20 years is $96,214.064166

Tom's after tax investment worth in 20 years = Tom's before tax investment worth in 20 years * (1 - tax rate)

Tom's after tax investment worth in 20 years = 96,214.064166 * (1 - 0.35)

Tom's after tax investment worth in 20 years = $62,539.1417079

jeff jeffy answered 2 years ago

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