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5 December, 14:02

Suppose that your marginal federal income tax rate is 30%, the sum of your marginal state and local tax rates is 5%, and the yield on thirty-year U. S. Treasury bonds is 10%. You would be indifferent between buying a thirty-year Treasury bond and buying a thirty-year municipal bond issued within your state (ignoring differences in liquidity, risk, and costs of information) if the municipal bond has a yield ofA) 6.5%.

B) 7.0%.

C) 9.5%.

D) 10.0%.

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Answers (1)
  1. 5 December, 14:43
    0
    Option (B) is correct.

    Explanation:

    Given that,

    Marginal federal income tax rate = 30%

    Sum of your marginal state and local tax rates = 5%

    Yield on thirty-year U. S. Treasury bonds = 10%

    Municipal bond has a yield:

    = U. S Treasury bonds * (1 - tax)

    = 10% * (1 - 30%)

    = (10 : 100) * [1 - (30 : 100) ]

    = (10 : 100) * (70 : 100)

    = (1 : 10) * (7 : 10)

    = (7 : 100)

    = 7%
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