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A municipal bond has a YTM of 4.11 percent while the YTM of a comparable taxable bond is 6.16 percent. What is the tax rate that will make an investor indifferent between the municipal bond and the taxable bond

User TasseKATT
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1 Answer

4 votes

Answer:

tax-rate 32.73%

Step-by-step explanation:

The municipal bonds are tax-free thus, the private corporate bond is a pre-tax yield. We should solve for thetax rate which makes the 6.16% private bond yield 4.11% after tax:

0.0611 x ( 1 - t ) = 0.0411

t = 1 - 0.0411/0.0611 = 0,32733224

Being taxed at 32.73% will make the investor indifferent between these two options.

User Krankuba
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