Question

An 4.75 percent coupon bond issued by the State of Washington sells for $1,000. What coupon rate on a corporate bond selling at $1,000 par value would produce the same after tax return to the investor as the municipal bond if the investor is in the 28 percent marginal tax bracket?

Answer 1

6.6%

Step-by-step explanation:

Data provided as per the question

Coupon bond percentage = 4.75%

Investor percentage = 28%

The computation of coupon rate of the corporate bond is given below:-

Coupon rate of the corporate bond = Coupon bond percentage ÷ (1 - Investor percentage)

= 4.75% ÷ (1 - 0.28)

= 4.75% ÷ 0.72

= 6.6%

Therefore for computing the Coupon rate of the corporate bond we simply applied the above formula.