Question

An investor purchases one municipal bond and one corporate bond that pay rates of return of 4% and 5.5%, respectively. If the investor is in the 20% tax bracket, his after-tax rates of return on the municipal and corporate bonds would be, respectively, _____.

Answer 1

After-tax rates of return on the municipal bond is 4%

After-tax rates of return on the corporate bond is 4.4%

Step-by-step explanation:

given data

rates of return = 4% = 0.04

rates of return = 5.5% = 0.055

tax bracket = 20% = 0.20

solution

we get here After-tax rates of return on the municipal bond that is

and here no taxes are levied so

rates of return = return ( 1 - 0 )

rates of return = 0.04 (1 - 0)

rates of return = 0.04 or 4%

and now we get After-tax rates of return on the corporate bond

rates of return = 0.055 × (1 - 0.20)

rates of return = 0.044 or 4.4%