Question

X Problem P5-9 (similar to)

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Based on the after-tax retums, at what federal tax rate (as shown in Chapter 4) is an investor better off choosing a tax-exempt 7 16 percent municipal bond over a
taxable 10.39 percent corporate bond?
The after-tax retum on the corporate bond when the tax rate is 10% is %

Answer 1

The after-tax rate for the Corporate Bond when the tax rate is 10% is 9.35%

Explanation:

The investor is better of at any rate above 30%, i.e 31% of tax rate would give the investor 7.1691% return ( 10.39 − ( 10.39 ⋅ 31 % ) )

Thus the return from the tax exempt municipal bond would be higher than the return from the taxable corporate bond.

The after-tax rate for the Corporate Bond when the tax rate is 10% is 9.35%( 10.39 − ( 10.39 ⋅ 10 % ) )