Jane Smith currently holds tax-exempt bonds of Good Samaritan Healthcare that pay 7 percent interest. She is in the 40 percent tax bracket. Her broker wants her to buy some Beverly Enterprises taxable bonds that will be issued next week. With all else the same, what rate must be set on the Beverly bonds to make Jane interested in making a switch?

7/(1-.4)= 11.67%

To determine the rate that must be set on the Beverly bonds for Jane to be interested in making a switch, we need to compare the after-tax yield of her current tax-exempt bonds with the after-tax yield of the new taxable Beverly bonds.

1. Calculate the after-tax yield of Jane's current tax-exempt bonds:
The bond pays 7 percent interest, which is tax-exempt. Since Jane is in the 40 percent tax bracket, the after-tax yield can be calculated as (1 - 40%) multiplied by the interest rate:
After-tax yield = (1 - 0.40) * 7% = 0.60 * 7% = 4.20%.

2. Determine the required rate on the Beverly bonds:
The required rate on the Beverly bonds needs to be higher than 4.20% to make Jane interested in switching.

Therefore, the rate set on the Beverly bonds must be greater than 4.20% to make Jane interested in making the switch.