An investor who pays taxes at the 28% marginal tax rate would need to earn what coupon rate on a corporate bond similar in all respects other than taxes to a 5% coupon municipal bond:

Question

Quizplus · Accepted Answer

The after-tax yield on a 5% coupon municipal bond for an investor in the 28% tax bracket is 5% * (1 - 0.28) = 3.60%. To earn the same after-tax yield on a corporate bond, the investor would need to find one with a coupon rate of: 3.60% / (1 - 0.28) = 5.00% / 0.72 = 6.94%. Therefore, the answer is D.

An Investor Who Pays Taxes at the 28% Marginal Tax