An investor purchases one municipal bond and one corporate bond that pay rates of return of...

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An investor purchases one municipal bond and one corporate bond that pay rates of return of...

An investor purchases one municipal bond and one corporate bond that pay rates of return of 4% and 5.5%, respectively. If the investor is in the 20% tax bracket, his after-tax rates of return on the municipal and corporate bonds would be, respectively, _____.

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Answer 1

Answer #1

After-tax rates of return on the municipal bond = 0.04(1 - 0) = 0.04 or 4%

After-tax rates of return on the corporate bond = 0.055(1 - 0.20) = 0.044 or 4.4%

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Answer 2

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