Question

g Consider an investor who is in the 38% tax bracket. For this investor a municipal bond paying 6% interest is equivalent to a corporate bond paying _____ interest

Answer 1

9.68%

Step-by-step explanation:

Since municipal bonds are not taxed by the federal government, their yield is basically an after tax yield. In order to compare it to regular corporate bonds or US securities, we can use the following formula:

municipal bond yield = corporate bond yield x (1 - tax rate)

0.06 = bond yield x (1 - 38%)

0.06 = bond yield x 0.62

bond yield = 0.06 / 0.62 = 0.096774 = 9.68%