Question

Assume that Bill's marginal tax rate is 22 percent. If corporate bonds pay 9 percent interest, what interest rate would a municipal bond have to offer for Bill to be indifferent between the two bonds? (Do not round your final answer.)

		10.80 percent
		22.00 percent
		8.00 percent
		7.02 percent
		9.00 percent

Answer 1

Since interest on munciple bonds are tax free so the munciple bonds interest rates to match the bill should be after tax
Interest on bonds	9%
Marginal tax on interest @ 22%	1.98%
After tax interest on bonds	7.02%
So the munciple bonds should be issued at 7.02% to be indifferent with Bill