If an individual is in the 35 percent income tax bracket and corporate debt yields 7.5 percent, then to be competitive municipal debt must yield at least

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Quizplus · Accepted Answer

Municipal bonds are often tax-exempt, meaning the interest income earned is not subject to federal income taxes, and sometimes state and local taxes as well. To compare the after-tax yield of a taxable bond to a tax-exempt municipal bond for someone in the 35% tax bracket, you use the formula: Taxable Equivalent Yield = Tax-Exempt Yield / (1 - Tax Rate). Rearranging to find the minimum yield for the municipal bond to be competitive with a 7.5% corporate bond yield gives: Minimum Municipal Yield = Corporate Bond Yield * (1 - Tax Rate). Plugging in the numbers: 7.5% * (1 - 0.35) = 4.875%. Therefore, to be competitive with a 7.5% corporate bond yield, a municipal bond must yield at least 4.88%.

If an Individual Is in the 35 Percent Income Tax