Question

# A municipal bond has a YTM of 5.01 percent while the YTM of a comparable taxable...

A municipal bond has a YTM of 5.01 percent while the YTM of a comparable taxable bond is 7.69 percent. What is the tax rate that will make an investor indifferent between the municipal bond and the taxable bond?​

#### Homework Answers

Answer #1

Municipal bond doesn’t have tax liability; its income is exempted from tax. It makes the bond attractive and can issue at lower YTM compare to a taxable bond.

Required tax rate = 1 – (Municipal bond YTM / Taxable bond YTM)

= 1 – (5.01 / 7.69)

= 1 – 0.6515

= 0.3485

It should be multiplied by 100 to get the tax rate in percentage form. (0.3485 × 100 =) 34.85%.

Answer: The required tax rate is 34.85%.

Know the answer?
Your Answer:

#### Post as a guest

Your Name:

What's your source?

#### Earn Coins

Coins can be redeemed for fabulous gifts.

##### Not the answer you're looking for?
Ask your own homework help question
ADVERTISEMENT
##### Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

ADVERTISEMENT