Reference no: EM132168895

Question: A prosperous businessman is considering two alternative investments in bonds. In both cases the first interest payment would be received at the end of the first year. If his personal taxable income is fixed at $40,000 and he is single, which investment produces the greater after-tax rate of return? Compute the after-tax rate of return for each bond to within 1/4 of 1 percent. Ann Arbor Municipal Bonds: A bond with a face value of $1000 pays $60 per annum. At the end of 15 years, the bond becomes due ("matures"), at which time the owner of the bond will receive $1000 plus the final $60 annual payment. The bond may be purchased for $800. Since it is a municipal bond, the annual interest is not subject to federal income tax. The difference between what the businessman would pay for the bond ($800) and the $1000 face value he would receive at the end of 15 years must be included in taxable income when the $1000 is received. Southern Coal Corporation Bonds: A thousand-dollar bond yields $100 per year in annual interest payments. When the bonds mature at the end of 20 years, the bondholder will receive $1000 plus the final $100 interest. The bonds may be purchased now for $1000. The income from corporation bonds must be included in federal taxable income.