Suppose that a bond is granted a favorable tax treatment such that the interest and any capital gain from this bond would not be taxed. Suppose that the marginal tax rate on otherwise equivalent taxable bonds is 25% and the appropriate discount rate is 7%. What is the after-tax discount rate?

Question

Quizplus · Accepted Answer

The after-tax discount rate is calculated by multiplying the discount rate by (1 - tax rate). So, 7% * (1 - 0.25) = 5.25%.

Suppose That a Bond Is Granted a Favorable Tax Treatment