Question

an 8.0% coupon bond issued by the state of indiana sells for $1,000. what coupon rate on a corporate bond selling at its $1,000 par value would produce the same after-tax return to the investor as the municipal bond if the investor is in: the 15% marginal tax bracket? do not round intermediate calculations. round your answer to two decimal places.

Answer 1

To calculate the equivalent coupon rate on a corporate bond that would produce the same after-tax return as the municipal bond, divide the municipal bond coupon rate by (1 - tax rate). In this case, the equivalent coupon rate would be 9.41%.

Step-by-step explanation:

To determine the coupon rate on a corporate bond that would produce the same after-tax return as the municipal bond, we need to consider the investor's tax bracket. In this case, the investor is in the 15% marginal tax bracket. Since municipal bond interest is tax-exempt, we can calculate the equivalent coupon rate using the formula:

Equivalent Coupon Rate = Municipal Bond Coupon Rate / (1 - Tax Rate)

Plugging in the values, the equivalent coupon rate is:

Equivalent Coupon Rate = 8.0% / (1 - 0.15) = 9.41%