Put the following securities in order according to their after-tax interest rates, from lowest to highest. The federal tax rate on interest income is 30 percent. Show your work.
A:A corporate bond that pays an interest rate of 6 percent.B:A corporate bond that pays an interest rate of 7 percent.C:A local government bond identical that pays an interest rate of 4.5 percent.
What will be an ideal response?
The after-tax interest rate is (1 ?t) ×i for the corporate bonds, but the local government bond is free from tax.
| A: | (1 ? 0.3) × 6% = 4.2% |
| B: | (1 ? 0.3) × 7% = 4.9% |
| C: | (1 ? 0.0) × 4.5% = 4.5% |
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