John Doe is in the 40 percent tax bracket. He is considering investing in HCA bonds that carry a 12 percent interest rate.
A. What is his after-tax interest rate on the bonds?
AT= BT * (1-T)
12% * (1-.40) = 7.2%
I think... almost positive that's the answer, hope it helps
To calculate John Doe's after-tax interest rate on the HCA bonds, we need to determine the portion of the interest income that will be subjected to taxes.
Step 1: Determine the taxable portion of the interest income
John Doe's marginal tax rate is 40 percent, which means that 40 percent of his interest income will be subject to taxes.
Step 2: Calculate the after-tax interest rate
The remaining portion of the interest income, after taxes are deducted, will be his after-tax interest rate. So, we need to calculate the after-tax portion and add it to the initial interest rate.
Formula: After-tax interest rate = Initial interest rate × (1 - Tax rate)
Let's calculate the after-tax interest rate:
After-tax interest rate = 12% × (1 - 40%)
After-tax interest rate = 12% × (1 - 0.4)
After-tax interest rate = 12% × 0.6
After-tax interest rate = 7.2%
Therefore, John Doe's after-tax interest rate on the HCA bonds is 7.2%.