Question

An investor can invest in either a tax exempt security that pays 5% or a taxable corporate security of comparable risk and maturity that pays 8%. At what marginal tax rate will the investor be indifferent between those two securities?

Answer 1

Say, At X% of the tax rate the investor would be indifferent between two securities.

So, 8%*(1-X%)=5%

or, X=37.5%

Hence, At 37.5% of marginal tax rate investor will be indifferent between two securities.