Suppose that your marginal federal income tax rate is 30%, the sum of your marginal state and local tax rates is 5%, and the yield on a thirty-year corporate bond is 10%. You would be indifferent between buying this corporate bond and buying a thirty-year municipal bond (ignoring differences in liquidity, risk, and costs of information) if the municipal bond has a yield of
A)6.5%.
B)7.0%.
C)9.5%.
D)10.0%.

Question

Quizplus · Accepted Answer

The after-tax yield on the corporate bond is 10% * (1 - 0.35) = 6.5%. You would be indifferent if the municipal bond, which is tax-exempt, also yields 6.5%.

Suppose That Your Marginal Federal Income Tax Rate Is 30