Question

A 7-year municipal bond yields 4.80%. Your marginal tax rate (including state and federal taxes) is 32.00%. What interest rate on a 7-year corporate bond of equal risk would provide you with the same after-tax return

Answer 1

the Interest rate on corporate bond is 7.06%

Step-by-step explanation:

The computation of the rate of interest is shown below:

As we know that

The Interest rate on corporate bond × (1 - tax rate) = Municipal bond yield

The Interest rate on corporate bond × (1 - 0.32) = 4.80%

The Interest rate on corporate bond × 0.68 = 4.80%

The Interest rate on corporate bond = 4.80% ÷ 0.68

= 7.06%

Hence, the Interest rate on corporate bond is 7.06%