Assume that Larry's marginal tax rate is 24 percent. If corporate bonds pay 7.2 percent interest, what interest rate would a municipal bond have to offer for Larry 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 yield of the municipal bond. The after-tax yield of the corporate bond is 7.2% * (1 - 0.24) = 5.472%. Therefore, the municipal bond should offer approximately 5.47%.

Assume That Larry's Marginal Tax Rate Is 24 Percent