Question

. An investor purchases one municipal and one corporate bond that pay rates of return of 8% and 10%, respectively. If the investor is in the 20% marginal tax bracket, his or her after-tax rates of return on the municipal and corporate bonds would be ________ and ______, respectively. A. 8%; 10% B. 8%; 8% C. 6.4%; 8% D. 6.4%; 10% E. 10%; 10%

Answer 1

8% , 8%

Step-by-step explanation:

Given:

Municipal bonds rate of return = 8%

Corporate bonds rate of return = 10%

marginal tax = 20%

Computation of After tax return on municipal bond:

= 8%

Computation of After tax return on Corporate bond:

= Corporate bonds rate of return (1-Marginal tax)

= 10% (1- 20%)

= 10% (1-0.20)

= 10% (0.80)

= 8%

Therefore the municipal and corporate bonds after tax rate of return is 8% and 8% .