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%.

Question

Business

Ella Stanley

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%.

+5

Answers (1)

Know the Answer?

Tamara Heath · Answer 1

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%