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3. A municipal bond with a face value of $1,000 is paying a coupon rate of 9%. If an investors tax rate is 30%, what rate of
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3. The municipal bond is paying a coupon rate of 9%.

Since, the municipal bonds are tax free, the after tax yield is also 9%.

Now, a corporate bond should earn a rate of 9% post tax, for that he should be paid

= 9% / (1 - 0.3)

= 12.86%

So, the similar corporate bond should provide a rate of return equal to 12.86% to make the investor indifferent between buying the corporate bond or the municipal bond.

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