Assume that Larry's marginal tax rate is 25%.If corporate bonds pay 10% interest,what interest rate would a municipal bond have to offer for Larry to be indifferent between the two bonds?

Question

Quizplus · Accepted Answer

The after-tax yield of the corporate bond would be 10% x (1 - 0.25) = 7.50%. Therefore, a municipal bond would have to offer a yield of at least 7.50% for Larry to be indifferent between the two bonds. Choosing the municipal bond would allow him to avoid paying taxes on the interest income, which makes the lower yield acceptable.

Assume That Larry's Marginal Tax Rate Is 25