Assume that John's marginal tax rate is 40%. If a city of Austin bond pays 6% interest, what interest rate would a corporate bond have to offer for John to be indifferent between the two bonds?

Question

Quizplus · Accepted Answer

To be indifferent, the after-tax yield of the corporate bond should equal the tax-free yield of the municipal bond. The after-tax yield of the corporate bond is calculated as the interest rate times (1 - tax rate). So, 6% = x * (1 - 0.40). Solving for x gives x = 10%.

Assume That John's Marginal Tax Rate Is 40