A bond investor is considering two 10 year maturity bonds both rated A: the municipal bond...
A bond investor is considering two 10 year maturity bonds both rated A: the municipal bond is yielding 2.40% and the corporate bond is yielding 3.25%. At what marginal tax rate would the bond investor be indifferent between the two bonds? Enter your answer rounded off to two decimal points.
Homework Answers
Municipal bond incomes are tax free. However the incomes on corporate bonds are taxable.
If T is the tax rate, the post tax yield on Corporate bond = 3.25% x (1 - T)
For indifference:
3.25% x (1 - T) = 2.40%
Hence, Marginal tax rate, T = 1 - 2.40% / 3.25% = 26.15%
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