Assume that Lavonia's marginal tax rate is 22 percent. If a city of Tampa bond pays 5 percent interest, what interest rate would a corporate bond have to offer for Lavonia to be indifferent between the two bonds?

Question

Quizplus · Accepted Answer

To find the equivalent taxable interest rate that would make Lavonia indifferent between a tax-exempt bond (like a municipal bond from the city of Tampa) and a taxable bond (like a corporate bond), we use the formula: Taxable Interest Rate = Tax-Exempt Interest Rate / (1 - Marginal Tax Rate). Plugging in Lavonia's details: 5% / (1 - 0.22) = 5% / 0.78 ≈ 6.41%. Since none of the provided options matches this calculation, the correct answer is E) None of the choices are correct.

Assume That Lavonia's Marginal Tax Rate Is 22 Percent