You have $10,000 cash, which you want to invest. Normally, you would deposit the money in a savings account that pays an annual interest rate of 6%. However, you are now considering the possibility of investing in a bond. Your marginal tax rate is 30% for both ordinary income and capital gains. You expect the general inflation rate to be 3% during the investment period. You can buy a high-grade municipal bond costing $10,000 that pays interest of 9% ($900) per year. This interest is not taxable. A comparable high-grade corporate bond is also available that is just as safe as the municipal bond but pays an interest rate of 12% ($1,200) per year. This interest is taxable as ordinary income. Both bonds mature at the end of year 5.(a) Determine the real (inflation-free) rate of return for each bond.(b) Without knowing your MARR, can you make a choice between these two bonds?
You have $10,000 cash, which you want to invest. Normally, you would deposit the money in a savings account that pays an annual interest rate of 6%. However, you are now considering the possibility of investing in a bond. Your marginal tax rate is 30% for both ordinary income and
(a) Determine the real (inflation-free)
(b) Without knowing your MARR, can you make a choice between these two bonds?
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