An investor can purchase an 8% tax exempt or a 10% corporate bond. His marginal tax rate to buy the tax exempt should be at least

Question

Quizplus · Accepted Answer

To determine the minimum marginal tax rate required to make purchasing the 8% tax exempt bond more beneficial than purchasing the 10% taxable bond, use the following formula:

(8% / (100% - Marginal Tax Rate)) > 10%

Solving for the Marginal Tax Rate:
(8% / (100% - Marginal Tax Rate)) > 10%
0.08 / (1 - Marginal Tax Rate) > 0.10
0.08 > 0.10 - 0.10 x Marginal Tax Rate
0.10 x Marginal Tax Rate > 0.02
Marginal Tax Rate > 0.02 / 0.10
Marginal Tax Rate > 0.20 or 20%

Therefore, the answer is A) 20%.

An Investor Can Purchase an 8% Tax Exempt or a 10