Question

1. Matt recently deposited $30,000 in a savings account paying a guaranteed interest rate of 5 percent for the next 10 years. If Matt expects his marginal tax rate to be 22 percent for the next 10 years, how much interest will he earn after-tax after the seventh year of his investment if he withdraws enough cash every year to pay the tax on the interest he earns?

1. Dana intends to invest $25,000 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. Dana’s federal marginal rate is 25 percent and her marginal state rate is 10 percent. What is the amount by which the yield on the corporate bond exceeds the yield on the Treasury bond.  Assume that Dana itemizes her deductions and that any state income tax would be fully deductible.  

1. Hayley recently invested $55,000 in a public utility stock paying a 3 percent annual dividend. If Hayley reinvests the annual dividend she receives net of any taxes owed on the dividend, how much will her investment be worth in four years if the dividends paid are qualified dividends? (Hayley’s marginal income tax rate is 32 percent.)

1. John bought 1,000 shares of Intel stock on October 18, 2018 for $35 per share plus a $750 commission he paid to his broker. On December 12, 2020, he sells the shares for $48.50 per share. He also incurs a $1,000 fee for this transaction. What is the gain/loss for John on the sale of his Intel stock?

Answer 1

1. A. Given

Matt recently deposited $30,000 ; Guaranteed Interest Rate - 5 % for the next 10 years ;

Marginal tax rate - 22% for next 10 Years

Account Balance after 7 Years if he withdraws enough cash every year to pay the tax on the interest he earns = 30,000 x [1+0.05(1-0.22)]^7 = 39,213

Therefore, Interest after-tax after the seventh year is = 39,213 x 5% = 1,961

2. A. The Treasury bond yields 25,000 x [0.05 x(1-0.24)] = 950 after tax

The corporate bond yields 25,000 x [0.06 x (1-0.24)] = 1,140 after tax

The amount by which the yield on the corporate bond exceeds the yield on the Treasury bond = $190

3. A. If Hayley receives qualified dividends, her annual after-tax rate of return will be

3% x (1-0.32)=2.04%

If the dividends paid are qualified dividends her investment in four years be worth

55,000 x (1+0.0204)^4= $59,627

4. A. The Purchase price of Intel Stock = (1000 x 35)+750=35,750

  The Selling Price of sotck = (1000 x 48.50) - 1000 = 47,500

Therefor the Gain on Sale of Stock = 11,750