Question

City of Phanagoria has an outstanding municipal bond that pays 6.72 percent interest. How much would a corporate bond have to pay (in percents) to be equivalent to this on an aftertax basis if you are in the 34 percent tax bracket?

Answer 1

Solution:-

Let "y" be the rate of interest to paid by the corporate whose after tax return = 6.72%

Now,

Before tax return×(1-tax)=After tax return

                                                                                                                    

    Y*(1-0.34) = 6.72%

                Y= 6.72%/0.66

                Y=10.18%

Hence the corporate has to pay 10.18%.

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