Fergie has the choice between investing in a state of new york bond at 9.4 percent and a surething inc. bond at 12.0 percent. assuming that both bonds have the same nontax characteristics and that fergie has a 30 percent marginal tax rate, in which bond should she invest?

She should invest in a State of New York bond.

Explanation:

The return on a State of New York bond is 9.4%.

The return on a Surething Inc. bond is 12%.

Fergie has a 30% marginal tax.

A state tax will not be taxed. However, a corporate bond will be taxed.

After tax return will be

=

=

= 0.12 - 0.036

= 0.084

So, the return after tax will be 8.4%.

This is lower than the return on the state bond.

So, Fergie will invest in State bond.

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