A 5-year corporate bond yields 9 percent. A 5-year municipal bond of equal risk yields 6.5 percent. Assume that the state tax rate is zero. At what federal tax rate are you indifferent between the two bonds?

Question

Quizplus · Accepted Answer

The correct answer is A because at a federal tax rate of 27.78%, the after-tax yield on the corporate bond will be equal to the after-tax yield on the municipal bond.

A 5-Year Corporate Bond Yields 9 Percent