Question

Dana intends to invest $30,000 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-1. 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 that Dana itemizes deductions.

    

• Corporate bond

• Treasury bond

a-2. How much interest after-tax would Dana earn by investing in the corporate bond? (Do not round intermediate calculations and round your final answer to the nearest whole dollar amount.)

Interest after-tax:

Answer 1

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Dana
Answer a 1
When the state rate is 5%, Dana would achieve the following returns from Treasury bond and corporate bond.
The treasury bond yields:		Note
Amount	30,000.00	A
Rate of return	5%	B
Return amount	1,500.00	C=A*B
Tax at 24%	360.00	D=C*24%
Treasury bond yield	1,140.00	E=C-D
The corporate bond yields:		Note
Amount	30,000.00	See A
Rate of return	6%	F
Return amount	1,800.00	G=A*F
Tax at 24%	432.00	H=G*24%
Balance	1,368.00	I=G-H
Tax at 5%	68.40	J=I*5%
Corporate bond yield	1,300	K=I-J
The return from Corporate bond is higher so Dana would choose Corporate bond .
Answer a 2
Dana would earn after-tax interest of $ 1,300 by investing in the corporate bond.