A prosperous businessman is considering twoalternative

Chapter , Problem 12-65

(choose chapter or problem)

A prosperous businessman is considering twoalternative investments in bonds. In both cases thefirst interestpaymentwouldbe receivedat theend ofthe first year. If his personal taxable income is fixedat $40,000 and he is single, which investment pro-duces the greater after-tax rate of return? Computethe after-tax rate of return for each bond to within1/4of 1 percent.Ann Arbor MunicipalBonds:A bond with a facevalue of $1000 pays $60 per annum. At the endof 15 years, the bond becomes due (matures),at which time the owner of the bond will receive$1000 plus the final $60 annual payment. Thebond may be purchased for $800. Since it is a municipal bond, the annual interest isnotsubject to federal income tax. The differencebetween what the businessman would pay forthe bond ($800) and the $1000 face value hewould receive at the end of 15 years must beincluded in taxable income when the $1000 isreceived.Southern Coal Corporation Bonds:Athousand-dollar bond yields $100 per year inannual interest payments. When the bondsmature at the end of 20 years, the bond-holder will receive $1000 plus the final $100interest. The bonds may be purchased nowfor $1000. The income from corporationbonds must be included in federal taxableincome.