A municipal bond is paying a 6 percent annual yield. An equivalent risk corporate bond is paying 7 percent. Investors with a tax rate of ________ or higher would prefer the municipal bond.

Question

Quizplus · Accepted Answer

Investors would prefer the municipal bond if the after-tax yield of the corporate bond is less than the municipal bond yield. The after-tax yield of the corporate bond is 7% * (1 - tax rate). Setting this equal to the municipal bond yield of 6% gives 7% * (1 - tax rate) = 6%. Solving for the tax rate gives a tax rate of 14.28% or higher.

A Municipal Bond Is Paying a 6 Percent Annual Yield