An investor purchases one municipal and one corporate bond that pay rates of return of 8% and 10%, respectively. If the investor is in the 22% marginal tax bracket, his or her after-tax rates of return on the municipal and corporate bonds would be ________ and ______, respectively.

Question

Quizplus · Accepted Answer

Municipal bond interest is typically tax-exempt, so the after-tax return remains 8%. The corporate bond's after-tax return is calculated by reducing the 10% return by the 22% tax rate, resulting in 7.8%.

An Investor Purchases One Municipal and One Corporate Bond That