The break-even tax rate between a taxable corporate bond yielding 7% and a comparable nontaxable municipal bond yielding 5% can be expressed as:

Question

Quizplus · Accepted Answer

The break-even tax rate formula is expressed as follows: Taxable yield = Nontaxable yield / (1 - tax rate). Substituting the values given in the question, we get:
0.07 = 0.05 / (1 - tax rate)
0.07*(1 - tax rate) = 0.05
0.07 - 0.07*tax rate = 0.05
0.07*tax rate = 0.02
tax rate = 0.02 / 0.07 = 0.2857
Multiplying this by 100 to get the percentage, we get 28.57%, which is the break-even tax rate. Therefore, the correct answer is A.

The Break-Even Tax Rate Between a Taxable Corporate Bond Yielding