Question

You can invest in taxable bonds that are paying a yield of 9.0 percent or a municipal bond paying a yield of 7.25 percent. Assume your marginal tax rate is 28 percent. a. Calculate the after-tax rate of return on the taxable bond?

Answer 1

To calculate the after-tax rate of return on a taxable bond with a 9.0 percent yield and a 28 percent marginal tax rate, you multiply the yield by 1 minus the tax rate, resulting in a 6.48 percent after-tax return.

Step-by-step explanation:

To calculate the after-tax rate of return on the taxable bond paying a yield of 9.0 percent with a marginal tax rate of 28 percent, we use the formula:

After-tax return = Yield * (1 - Marginal tax rate)

Plugging the values in, we get:

After-tax return = 9.0% * (1 - 0.28)

After-tax return = 9.0% * 0.72 = 6.48%

Therefore, the after-tax rate of return on the taxable bond is 6.48 percent.