Suppose that your marginal federal income tax rate is 30%,the sum of your marginal state and local tax rates is 5%,and the yield on a thirty-year corporate bond is 10%.You would be indifferent between buying this corporate bond and buying a thirty-year municipal bond issued within your state (ignoring differences in liquidity,risk,and costs of information)if the municipal bond has a yield of
A) 6.5%.
B) 7.0%.
C) 9.5%.
D) 10.0%.

Question

Quizplus · Accepted Answer

The after-tax yield on the corporate bond is 10% * (1 - 0.35) = 6.5%. You would be indifferent if the municipal bond, which is tax-exempt, also yields 6.5%.

Suppose That Your Marginal Federal Income Tax Rate Is 30%,the