Question

A bond investor is considering two 10 year maturity bonds both rated A: the municipal bond is yielding 2.40% and the corporate bond is yielding 3.25%. At what marginal tax rate would the bond investor be indifferent between the two bonds? Enter your answer rounded off to two decimal points.

Answer 1

Tax exempt interest rate municipal bonds=   2.40%
Taxable ínterest rate on corporate bonds=   3.25%
  
exempt interest provided by Municipal bonds=  
=Taxable interest rate*(1-tax rate)  
2.4% = 3.25%*(1-tax rate)  
1-tax rate = 2.4%/3.25%  
1-tax rate=   0.73846
tax rate = 1-0.73846  
0.26154   or
26.15%  
So tax rate should be   26.15%
to be indifferent between bonds