Question

A corporate bond currently yields 8.5 percent. Tax-except municipal bonds with the same risk, maturity, and liquidity currently yield 5.5 percent. At what tax rate would investors be indifferent between the two bonds? a. 35.29% b. 40.00% c. 24.67% d. 64.71% e. 30.04%

Answer 1

a. 35.29%

Step-by-step explanation:

The computation of the tax rate that could be non-different between the two bonds is shown below:

Given that

Corporate Bond yield = 8.5%

Municipal bonds yield = 5.5%

based on the above information

Tax Rate is

= 1 - ( Municipal bonds yield - Corporate Bond yield)

= 1 - (5.5% ÷ 8.5%)

= 35.29%

Hence, the tax rate is 35.29%

We simply applied the above formula so that the correct value could come

And, the same is to be considered