A corporate bond currently yields 8.5 percent. Municipal bonds with the same risk, maturity, and liquidity currently yield 5.5 percent. At what tax rate would investors be indifferent between the two bonds?

Question

Quizplus · Accepted Answer

The tax rate at which investors would be indifferent is calculated using the formula: Tax Rate = 1 - (Municipal Yield / Corporate Yield). Substituting the given yields: Tax Rate = 1 - (5.5% / 8.5%) = 1 - 0.6471 = 0.3529 or 35.29%.

A Corporate Bond Currently Yields 8