Assume that John's marginal tax rate is 40%. If a city of Austin bond pays 6% interest, what interest rate would a corporate bond have to offer for John to be indifferent between the two bonds?

Question

Quizplus · Accepted Answer

To be indifferent, the after-tax yield of the corporate bond should equal the tax-free yield of the municipal bond. The after-tax yield is calculated as the corporate bond rate * (1 - tax rate). Solving for the corporate bond rate: 6% = corporate bond rate * (1 - 0.40), corporate bond rate = 10%.

Assume That John's Marginal Tax Rate Is 40