A 7-year municipal bond yields 4.8%. Your marginal tax rate (including state and federal taxes) is 27%. What interest rate on a 7 year corporate bond of equal risk would provide you with the same after-tax return? a. 5.64% b. 5.93% c. 6.25% d. 6.90% e. 6.58%

Question

Business

Maximus Patel

31 July, 02:27

A 7-year municipal bond yields 4.8%. Your marginal tax rate (including state and federal taxes) is 27%. What interest rate on a 7 year corporate bond of equal risk would provide you with the same after-tax return? a. 5.64% b. 5.93% c. 6.25% d. 6.90% e. 6.58%

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Answers (1)

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Diva · Answer 1

The correct answer is option (E).

Explanation:

According to the scenario, the given data are as follows:

Yield rate = 4.8%

Tax rate = 27%

So, we can use the following formula to calculate the interest rate:

= Yield rate / (1 - tax rate)

= 4.8% / (1 - 27%)

= 0.048 / (1 - 0.27)

= 0.048 / 0.73

= 0.06575

= 6.58%