Question

Assume that Marsha is indifferent between investing in a city of Destin bond that pays 3.35 percent interest and a corporate bond that pays 5.85 percent interest. What is Marsha's marginal tax rate? (Do not round intermediate computations.) Multiple Choice 85.48 percent 5774 percent None of the choices are correct 28.87 percent

Answer 1

Tax free yield on Destin bond = 3.35%

Taxable yield on corporate bond = 5.85%

Tax free yield = Taxable yield * (1 - marginal tax rate)

3.35% = 5.85% * (1 - marginal tax rate)

(1 - marginal tax rate) = 3.35%/5.85%

(1 - marginal tax rate) = 0.5726

Marginal Tax rate = 1 - 0.5726

= 0.4274

or 42.74%

Hence, none of the choices is correct