Question

A tax-exempt municipal bond has a yield to maturity of 5.47%. An investor, who has a marginal tax rate of 33.00%, would prefer and an otherwise identical taxable corporate bond if it had a yield to maturity of more than ____%.

Answer 1

The investor would prefer a taxable corporate bond if it had a yield to maturity of more than 12%.

Step-by-step explanation:

The investor would prefer a taxable corporate bond if it had a yield to maturity of more than 12%.

The yield to maturity measures the total return an investor can expect to earn from a bond if held until maturity. In this case, the investor has a marginal tax rate of 33%, so the after-tax yield on the tax-exempt municipal bond is 5.47% * (1 - 0.33) = 3.66%. Therefore, the investor would only prefer the taxable corporate bond if its yield to maturity is greater than 3.66% / (1 - 0.33) = 5.47%.