Question

An investor is in a 30% combined federal plus state tax bracket. If corporate bonds offer 9% yields, what yield must municipals offer for the investor to prefer them to corporate bonds?

Answer 1

0.063 or 6.3% (or more)

Step-by-step explanation:

Given:

Combined Tax Bracket = 30% = 30/100 = 0.30

Yields of corporate Bonds = 9% = 9/100 = 0.09

Yield to Shift Investors to choose municipal bonds = ?

Calculation:

Yield from corporate bond = (After tax yield) x Yield rate of corporate Bonds

= (0.70) x (0.09)

= 0.063 or 6.3%

Working note:

After tax yield = (1 - tax rate )

After tax yield = (1 - 0.30 )

After tax yield = (0.70)

so, they must give 6.3% yield