Charlene Can Invest $4,000 of After- Tax Dollars (AT$) Directly

question 905

Multiple Choice

Charlene can invest $4,000 of after- tax dollars (AT$) directly in a taxable bond outside an IRA, or she can contribute the $4,000 to a nondeductible IRA and invest in the same bond through the IRA vehicle. In either case, the bond yields an annual 7% before- tax rate of return (BTROR) . Charlene's marginal tax rate is 20%, and she expects it to remain so for the entire investment horizon of 25 years. What is her annualized after- tax rate of return (annualized ATROR) for the "bond outside the IRA"?

• A) 6.5%
• B) 7%
• C) 5.6%
• D) 6%

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