Alice received $35 twice a year in interest from her bond for which she paid $800 and which matured at $1,000 She held the bond for 6 years and had the option to reinvest the semiannual income at 5 annually Her salary is $66,000 a year Her marginal tax rate is 35 The tax rate on dividend income is ...

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Alice received $35 twice a year in interest from her bond for which she paid $800 and

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Question:

Alice received $35 twice a year in interest from her bond for which she paid $800 and which matured at $1,000. She held the bond for 6½ years and had the option to reinvest the semiannual income at 5% annually. Her salary is $66,000 a year. Her marginal tax rate is 35%. The tax rate on dividend income is 25%.

1. What is her EAR before-tax if she does not reinvest the interest income?

2. What is her EAR after-tax if she does not reinvest the interest income?

3. If Alice decides to reinvest her interest income, will her EAR after-tax be greater if taxes are paid semi-annually or annually? Explain.