Mr. Gordon, a resident of Pennsylvania, paid $20,000 for a bond issued by Delaware. This year, he received $800 of interest on the bond. His marginal state tax rate is 7%, and under Pennsylvania law, interest on debt obligations issued by another state is taxable. Mr. Gordon can deduct state income tax on his federal return, and his marginal federal tax rate is 35%. Compute his after-tax rate of return on the bond.
A. 3.825%
B. 3.725%
C. 4%
D. 2.420%
Answer: A
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