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Hugh has the choice between investing in a City of Heflin bond at 7.4 percent or investing in a Surething Incorporated bond at 104 percent. Assuming that both bonds have the same nontax characteristics and that Hugh has a 40 percent marginal tax rate, in which bond should he invest?
Hugh has the choice between investing in a City of Heflin bond at 7.4 percent or investing in a Surething Incorporated bond at 104 percent. Assuming that both bonds have the same nontax characteristics and that Hugh has a 40 percent marginal tax rate, in which bond should he invest?
Final answer:Hugh shouldinvestin theSurethingIncorporatedbond as it offers a higher after-tax return.Explanation:When deciding whether to invest in a City of Heflin bond or a Surething Incorporated bond, Hugh should consider the after-tax yields. The City of Heflin bond has a yield of 7.4 percent, while the Surething Incorporated bond has a yield of 104 percent. Since Hugh'smarginaltaxrate is 40 percent, he needs to calculate the after-tax yield for each bond.For the City of Heflin bond, the after-tax yield is calculated by multiplying the bond yield (7.4%) by (1 - marginal tax rate). So, the after-tax yield for the City ofHeflinbondis 7.4% x (1 - 0.40) = 4.44%.For the Surething Incorporated bond, the after-tax yield is equal to the bond yield (104%), as corporate bond interest payments are taxed at the same rate as the individual's marginal tax rate. Therefore, the after-tax yield for the Surething Incorporated bond is 104%.Comparing the after-tax yields, the Surething Incorporated bond has a higher after-tax yield of 104% compared to the City of Heflin bond with an after-tax yield of 4.44%. Therefore, Hugh should invest in the Surething Incorporated bond as it offers a higher after-tax return.Learn more about Bond investment here:brainly.com/question/34551784#SPJ11...