Question

Tucker just bought two bonds: a municipal bond from Raleigh and a corporate bond from IBM. The Raleigh bond pays 6% interest and the IBM bond pays 7.4% interest. If Tucker's tax bracket is 15%, then his after-tax interest rates on the Raleigh and IBM bonds would be [ ] respectively,

Multiple Choice

• 5.10% and 7.4%

• 6% and 7.4%

• 6.90% and 6.29%

• 6% and 6.29%

Answer 1

Municipal bonds are tax free in nature and corporate bonds are not.

So, post tax return on Releigh bond = pretax return = 6%

Post tax return on IBM bond = Pretax yield * (1 - Tax Rate) = 7.4% * (1 - 15%) = 6.29%

Answer: 6%, 6.29%