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? (Round your answer to 1 decimal place.)

Answer 1

after tax yield on corporate bonds = 6.3 %

Step-by-step explanation:

given data

federal plus state tax bracket = 30%

corporate bonds yields = 9%

solution

we get here yield that must municipals offer for the investor is express as

after tax yield on corporate bonds = corporate bonds yields × ( 1 - federal plus state tax bracket ) ......................1

put here value and we will get

after tax yield on corporate bonds = 9% × ( 1 - 30% )

after tax yield on corporate bonds = 0.09 × ( 1 - 0.30 )

after tax yield on corporate bonds = 0.063

after tax yield on corporate bonds = 6.3 %