Problem
April receives $60 every six months in interest income from her bond investment. She paid $950 for the bond and it will mature in 7 years for $1,000. She can reinvest the semi-annual interest income at 4% compounded annually. Her salary is $83,000 a year. Her marginal tax rate is 40%, which is also the applicable tax rate on interest income. The tax rate on dividend income is 30%. The tax rate on capital gain income is 20%. HINT: The first 2 questions below are beforetax, the last one is after-tax.
i. What is her annualized HPR before-tax if she does not reinvest the interest income?
ii. What is her annualized HPR before-tax if she reinvests the interest income?
iii. What is her annualized HPR after-tax if she reinvests the interest income and taxes are paid annually?