Question

Calculate the after-tax return of a 8.15 percent, 20-year, A-rated corporate bond for an investor in the 10 percent marginal tax bracket. Compare this yield to a 7.16 percent, 20-year, A-rated, tax-exempt municipal bond and explain which alternative is better. Repeat the calculations and comparison for an investor in the 33 percent marginal tax bracket. The after-tax return of a 8.15 percent, 20-year, A-rated corporate bond for an investor in the 10 percent marginal tax bracket is 7.34 %. (Round to two decimal places.) Compare this yield to a 7.16 percent, 20-year, A-rated, tax-exempt municipal bond and explain which alternative is better. (Select the best answer below.) A. The 7.16 percent tax free municipal bond is a better alternative than the after tax yield of 7.34 percent for the corporate bond at the 10 percent tax rate. B. The after tax yield of 7.34 percent for the corporate bond is a better alternative than the 7.16 percent tax free municipal bond at the 10 percent tax rate. The after-tax return of a 8.15 percent, 20-year, A-rated corporate bond for an investor in the 33 percent marginal tax bracket is %. (Round to two decimal places.)

Answer 1

The after tax return of 8.15%, 20 year, A rated corporate bond, 10% tax bracket

(1) The after tax return = 8.15%*(1-t) = 8.15%*(1-0.10) = 7.335 % = 7.34% (rounded to 2 decimals)

(2) The after tax yield of 7.34% for the corporate bond is a better alternative than the 7.16% tax free municipal bond at 10% tax rate

Now, if tax rate = 33%

(1) The after tax return = 8.15%*(1-t) = 8.15%*(1-0.33) = 5.4605% = 5.46% (rounded to 2 decimals)

(2) If tax rate = 33%, municipal bond is a better alternative [[[Thumbs up please]]]