A corporate bond currently yields 8.20%.Municipal bonds with the same risk,maturity,and liquidity currently yield 5.5%.At what tax rate would investors be indifferent between the two bonds? (Round your final answer to two decimal places. )

Question

Quizplus · Accepted Answer

To find the tax rate at which an investor would be indifferent between the two bonds, we need to calculate the after-tax yield of each bond. 
Let's assume a tax rate of x%, then the after-tax yield of the corporate bond would be:
After-tax yield of corporate bond = 8.20%*(1-x) = 0.082*(1-x)
Similarly, the after-tax yield of the municipal bond would be:
After-tax yield of municipal bond = 5.5%
Since the two bonds have the same risk, maturity, and liquidity, the investor would choose the bond with the higher after-tax yield. 
Thus, we can set the two after-tax yields equal to each other and solve for x:
0.082*(1-x) = 0.055
Solving for x gives us:
x = 32.93%
Therefore, at a tax rate of 32.93%, the investor would be indifferent between the two bonds.

A Corporate Bond Currently Yields 8