A bond investor is considering two 10 year maturity bonds both rated AA: the municipal bond...
| A bond investor is considering two 10 year maturity bonds both rated AA: | |||||||
| the municipal bond is yielding 2.47% and the corporate bond is yielding 4.36%. | |||||||
| At what marginal tax rate would the bond investor be indifferent between the two bonds? | |||||||
Homework Answers
Aftertax corporate bond yield=4.36*(1-tax rate)
Hence for investor to be indifferent:
4.36*(1-tax rate)=2.47%
1-tax rate=2.47/4.36
tax rate=1-(2.47/4.36)
which is equal to
=43.35%(Approx).
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