An investor is in a 35% combined federal plus state tax bracket. If corporate bonds offer...
| An investor is in a 35% combined federal plus state tax bracket. |
|
If corporate bonds offer 9.75% yields, what must municipals offer for the investor to prefer them to corporate bonds? (Round your answer to 2 decimal places.) |
Homework Answers
The rate to be offered by the municipals for the investor to prefer them to corporate bonds
The rate to be offered by the municipals for the investor will be after-tax yield of the Corporate Bonds
After-tax Yields = Pre-tax Yield x (1 – Tax Rate)
= 9.75% x (1 – 0.35)
= 9.75% x 0.65
= 6.34%
“Hence, the municipals must offer an After-tax Yield of 6.34%”
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