The Carey State Bank has purchased a bank-qualified municipal bond with a coupon rate of 6%.The bank has had to borrow funds to make this purchase at a cost of 5.25%.The bank is in the 40% tax bracket.What is the net after-tax return on this bank-qualified municipal bond?

Question

Quizplus · Accepted Answer

The net after-tax return on this bank-qualified municipal bond is 2.43%. This is calculated by taking the coupon rate of 6% and subtracting the cost of borrowing of 5.25%. The result is then multiplied by the tax bracket of 40%, which gives us the net after-tax return of 2.43%.

The Carey State Bank Has Purchased a Bank-Qualified Municipal Bond