posted by Angel Wright on .
John Doe is in the 40 percent personal tax bracket. He is considering investing in HCA bonds that carry a 12 percent interest rate.
a. What is his after-tax yield(interest rate) on the bonds?
b.Suppose Twin Cities Memorial Hospital has issued tax-exempt bonds that have an interest rate of 6 percent. With all else the same, should John buy the HCA or the Twin Cities bonds?
c. With all else the same, what interest rate on the tax-exempt Twin Cities bonds would make John indifferent between these bonds and the HCA bonds?
Twin Cities bond, a non-profit corporation, the investor would have to pay no taxes on the interest and would be able to keep the entire amount.