Question

Problem P5-9 (similar to) Based on the after-tax returms, at what federal tax rate (as shown in Chapter 4) is an investor better off choosing a tax-exempt 5.06 percent municipal bond over a taxable 725 percent corporate bond? The after-tax returm on the corporate bond when the tax rate is 10% is sN(Round to two decimal places)

Answer 1

The investor is better of at any rate above 30%, i.e 31% of tax rate would give the investor 5.00% return (7.25 - (7.25*31%)).

Thus the return from the tax exempt municipal bond would be higher than the return from the taxable corporate bond.

The after tax rate for the Corporate Bond when the tax rate is 10% is 6.53% (7.25 - (7.25*10%))