Question

**answer for part a, and b**

Suppose the interest rate on a taxable corporate bond is 4 percent while a municipal, tax exempt bond has an interest rate of 3 percent, and they are similar in every other way.

a. Assuming the income tax rate is 30 percent, calculate the after tax interest rate on the corporate bond. Is it higher or lower than the after tax return on the municipal bond?

b. What is the income tax rate that equalizes the after tax return between the corporate bond and the municipal bond.

Answer #1

**SOLUTION:-**

**a.** After tax interest rate of cororate Bond =
Interest rate on corporate bond * (1 - Income Tax)

After tax interest rate of corporate Bond = 4% * (1 - 0.30)

**After tax interest rate of corporate Bond =
2.80%**

**The return on corporate bond is lower than return on
municipal bond**

**b.** After tax interest rate of corporate Bond =
Interest rate on corporate bond * (1 - Income Tax)

**3% = 4% * (1 - Income tax)**

**Income tax = 25%**

**At 25% Income tax the tax return from corporate bond and
the municipal bond are equal.**

**THANK YOU**

**If any quearies please leave your valuable comment on
comment box.......**

A tax-exempt municipal bond pays 5.4% coupon interest annually
while a similar taxable bond is paying 7.5% annually. Taxpayers in
the _____ % marginal tax bracket and above would be better off
investing in the tax-exempt bond.
b) 15
d) 28
a) 10
c) 25

based on the after-tax returns, at what federal tax rate is an
investor better off choosing a tax-exempt 5.31 percent municipal
bond over a taxable 7.62 percent corporate bond?
The after-tax return on the corporate bond when the tax rate
is 10% is ___% (round to two decimal places)

Suppose there are two types of investors in the municipal bond
market. The interest on municipal bonds is tax free. 40% of the
participants pay a 30% tax rate and 60% pay a 15% tax rate.
Consider the following bond:
Price of bond = $1000
Interest payment on bond = $40
Interest payment on a similar bond with the same price that is
not tax free = $55
(10 points) Which, if any, type of investor should choose the
municipal...

Suppose there are two types of investors in the municipal bond
market. The interest on municipal bonds is tax free. 40% of the
participants pay a 30% tax rate and 60% pay a 15% tax rate.
Consider the following bond:
Price of bond = $1000
Interest payment on bond = $40
Interest payment on a similar bond with the same price that is
not tax free = $55
1. Which, if any, type of investor should choose the municipal
bond...

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