Question

question 2. Calculate the after tax return of a 9.17 percent, 20 year, A-rated corporate bond for an investor in the blank percent marginal tax bracket. Compare this yield to a 7.96percent, 20 year, A rated, tax exempt municipal bond and explain which alternative is better. Repeat the calculations and comparison for an investor in the 33percent marginal tax bracket.

The after tax return of a 9.17 percent, 20 year, A-rated corporate bond for an investor in the 15 percent marginal tax bracket is blank percent. (Round 2 decimal places)

Answer 1

The after tax return on corporate bond is calculated below:

After tax return = Before tax return x (1 – Taxrate)

After tax return = 0.0917 x (1 – 0.15)

After tax return = 0.077945

The after tax return is 7.79% (rounded off).

Return on municipal bond is 7.96% which is higher than corporate bond. Thus, municipal bond is better.

The after tax return on corporate bond is calculated below:

After tax return = Before tax return x (1 – Taxrate)

After tax return = 0.0917 x (1 – 0.33)

After tax return = 0.061439

The after tax return is 6.14% (rounded off).

Return on municipal bond is 7.96% which is higher than corporate bond. Thus, again municipal bond is better.