Question

A 5-year corporate bond yields 9.70%. A 5-year municipal bond of equal risk yields 6.5%. Assume that the state tax rate is zero. At what federal tax rate are you indifferent between the two bonds?a. 25.40%

b. 29.03%
c. 32.99%
d. 33.98%
e. 27.38%

Answer 1

c. 32.99%

Step-by-step explanation:

Risk yield = bond yield*(1 - Federal tax rate)

6.50% = 9.70%*(1 - Federal tax rate)

1 - Federal tax rate = 6.50%/9.70%

Federal tax rate = 1 - 6.50%/9.70%

= 32.99%

Therefore, The federal tax rate that you are indifferent between the two bonds is 32.99%