If the rate on a comparable corporate bonds is 8 percent, and the average marginal tax rate is 25 percent, in equilibrium, the rate on municipal bonds would be

Question

Quizplus · Accepted Answer

Municipal bonds are often tax-exempt, so their after-tax yield should be equivalent to the after-tax yield of taxable bonds. The after-tax yield of the corporate bond is 8% * (1 - 0.25) = 6%. Therefore, the municipal bond rate in equilibrium would be 6%.

If the Rate on a Comparable Corporate Bonds Is 8