Assume a corporate marginal tax rate of 38%. What yield on a municipal bond would leave a corporation indifferent between a 9% corporate bond and a municipal bond?
A)4.8%
B)5.58%
C)6.03%
D)7.2%

Question

Quizplus · Accepted Answer

To find the equivalent yield on a municipal bond that would make a corporation indifferent between it and a 9% corporate bond, we can use the following formula:

(1 - Marginal tax rate) = Yield on municipal bond ÷ Yield on corporate bond

Substituting the given values, we get:

(1 - 0.38) = Yield on municipal bond ÷ 0.09

0.62 = Yield on municipal bond ÷ 0.09

Yield on municipal bond = 0.62 x 0.09 = 0.0558 or 5.58%

Therefore, the answer is B.

Assume a Corporate Marginal Tax Rate of 38