Question

Taxpayer Y, who has a 15 percent marginal tax rate, invested $50,000 in a bond that pays 9 percent interest on a yearly basis. Compute Y’s annual net after-tax cash flow from this investment assuming that:

a) The interest on the bond is tax-exempt.
b) The interest on the bond is taxable.

Answer 1

Answer: $4500 ; $3825

Step-by-step explanation:

a. The interest on the bond is tax-exempt.

Since the interest on the bond is tax-exempt, the annual interest will be:

= $50,000 × 9%

= $50,000 × 0.09

= $4500

b) The interest on the bond is taxable.

The annual net cash flow will be:

= $4500 × (100% - 15%)

= $4500 × 85%

= $4500 × 0.85

= $3825