A 5-year corporate bond yields 9.70%. A 5-year municipal bond of equal risk yields 6.5%. Assume that the state tax rate is zero. At what federal tax rate are you indifferent between the two bonds? a. 25.40%

b. 29.03%

c. 32.99%

d. 33.98%

e. 27.38%

Question

Business

Terrence

2 May, 20:21

A 5-year corporate bond yields 9.70%. A 5-year municipal bond of equal risk yields 6.5%. Assume that the state tax rate is zero. At what federal tax rate are you indifferent between the two bonds? a. 25.40%

b. 29.03%

c. 32.99%

d. 33.98%

e. 27.38%

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Answers (1)

Know the Answer?

Bryan Powell · Answer 1

c. 32.99%

Explanation:

Risk yield = bond yield * (1 - Federal tax rate)

6.50% = 9.70% * (1 - Federal tax rate)

1 - Federal tax rate = 6.50%/9.70%

Federal tax rate = 1 - 6.50%/9.70%

= 32.99%

Therefore, The federal tax rate that you are indifferent between the two bonds is 32.99%

A 5-year corporate bond yields 9.70%. A 5-year municipal bond of equal risk yields 6.5%. Assume that the state tax rate is zero. At what federal tax rate are you indifferent between the two bonds? a. 25.40%b. 29.03%c. 32.99%d. 33.98%e. 27.38%

A 5-year corporate bond yields 9.70%. A 5-year municipal bond of equal risk yields 6.5%. Assume that the state tax rate is zero. At what federal tax rate are you indifferent between the two bonds? a. 25.40%

b. 29.03%

c. 32.99%

d. 33.98%

e. 27.38%