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Your bank has two checking account options, one pays tax-free interest at a rate of 2% per annum and the other pays taxable interest at a rate of 3% per annum. You are currently in a 25% marginal tax bracket. If you converted the tax-free interest rate to the comparable taxable interest rate, you would find that: A. The comparable taxable rate is 2.667%, thus you would select the taxable account. B. The comparable taxable rate is 2.35%, thus you would select the taxable account. C. The comparable taxable rate is 3.53%, thus you would select the tax-free account. D. You would always select the account bearing the highest interest rate.

Your bank has two checking account options, one pays tax-free interest at a rate of 2% per annum and the other pays taxable interest at a rate of 3% per annum. You are currently in a 25% marginal tax bracket. If you converted the tax-free interest rate to the comparable taxable interest rate, you would find that: A. The comparable taxable rate is 2.667%, thus you would select the taxable account. B. The comparable taxable rate is 2.35%, thus you would select the taxable account. C. The comparable taxable rate is 3.53%, thus you would select the tax-free account. D. You would always select the account bearing the highest interest rate.

EBK CONTEMPORARY FINANCIAL MANAGEMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter5: The Time Value Of Money
Section: Chapter Questions
Problem 4QTD
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General accounting

Your bank has two checking account options, one pays tax-free interest at a rate of 2% per annum and the other pays taxable interest at a rate of 3% per annum. You are currently in a 25% marginal tax bracket. If you converted the tax-free interest rate to the comparable taxable interest rate, you would find that: A. The comparable taxable rate is 2.667%, thus you would select the taxable account. B. The comparable taxable rate is 2.35%, thus you would select the taxable account. C. The comparable taxable rate is 3.53%, thus you would select the tax-free account. D. You would always select the account bearing the highest interest rate.
Transcribed Image Text:Your bank has two checking account options, one pays tax-free interest at a rate of 2% per annum and the other pays taxable interest at a rate of 3% per annum. You are currently in a 25% marginal tax bracket. If you converted the tax-free interest rate to the comparable taxable interest rate, you would find that: A. The comparable taxable rate is 2.667%, thus you would select the taxable account. B. The comparable taxable rate is 2.35%, thus you would select the taxable account. C. The comparable taxable rate is 3.53%, thus you would select the tax-free account. D. You would always select the account bearing the highest interest rate.
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