Suppose You Are an Investor with a Choice Between Three $\quad$

question 16

Essay

Suppose you are an investor with a choice between three investments in debt securities that are identical in every way except in terms of their interest rates and taxability.
Investment A: $\quad$ Interest rate 10 percent, tax rate 40 percent of interest income
Investment B: $\quad$ Interest rate 8 percent, tax rate 30 percent of interest income
Investment C: $\quad$ Interest rate 6.5 percent, tax rate 0 percent
Which investment provides the highest after-tax return? Show your work.

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Definitions:

Depreciation

The process of methodically dividing the expense of a physical asset over its estimated useful life.

Prepaid Services

Expenses paid in advance for services which will be received in the future.

Unearned Fees

Income received by a company for services yet to be provided or completed; recognized as a liability until the service is performed.

Journalize

The process of recording financial transactions in the chronological order in a company's general journal.