Fergie has the choice between investing in a State of New York bond at 5.8 percent and a Surething bond at 9.2 percent. Assuming that both bonds have the same nontax characteristics and that Fergie has a 30 percent marginal tax rate, what interest rate does the state of New York bond need to offer to make Fergie indifferent between investing in the two bonds? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Can you show what work you have done for this so far? Also, please just use your first name when posting.
To find the interest rate that the State of New York bond needs to offer, such that Fergie is indifferent between investing in the two bonds, we need to consider the after-tax return of each bond.
Let's calculate the after-tax return for each bond:
For the State of New York bond at 5.8 percent:
After-tax return = (1 - Marginal tax rate) x Interest rate
After-tax return = (1 - 0.30) x 0.058
After-tax return = 0.7 x 0.058
After-tax return = 0.0406
For the Surething bond at 9.2 percent:
After-tax return = (1 - Marginal tax rate) x Interest rate
After-tax return = (1 - 0.30) x 0.092
After-tax return = 0.7 x 0.092
After-tax return = 0.0644
To find the interest rate that makes Fergie indifferent between the two bonds, we set the after-tax return of the State of New York bond equal to the after-tax return of the Surething bond:
0.0406 = 0.0644
Now, we can solve this equation to find the interest rate that the State of New York bond needs to offer:
0.0406 = 0.0644
Interest rate = 0.0406 / 0.0644
Interest rate = 0.6298
Therefore, the State of New York bond needs to offer an interest rate of 62.98% to make Fergie indifferent between investing in the two bonds.
3.6*30=108
3*30=180