Question

A municipal bondholder buys a 5 percent coupon annual payment muni bond at a price of $4,900. The bond has a $5,000 face value. In one year she sells the bond for $4,975. The appropriate capital gains tax rate is 15 percent and her ordinary income tax rate is 28 percent.

A. What is her after-tax rate of return?

Answer 1

the after tax return on the investment is 6.40%

Step-by-step explanation:

5% interest on the face value: 5,000 x 5% = 250 this interest are tax exempt.

capital gain:

4,975 - 4,900 = 75

75 x 15% = 11.25

net return: 75 - 11.25 = 63.75

total return: 250 + 63.75 = 313.75

investment 4,900

313.75 / 4900 = 0,064030 = 6.40%