With reference to the above data, at what marginal tax rate would an investor be indifferent between owning the corporate bond and the municipal bond?
A) 18%
B) 20%
C) 22%
D) 28%

Question

Quizplus · Accepted Answer

An investor is indifferent between a corporate bond and a municipal bond when the after-tax yield on the corporate bond equals the yield on the municipal bond. The marginal tax rate that equates these yields is calculated using the formula: Taxable Yield * (1 - Tax Rate) = Tax-Free Yield. Solving for the tax rate gives the rate at which the investor is indifferent.

With Reference to the Above Data, at What Marginal Tax