Debt issued by Drumpt corporation currently yields 11%. A municipalbond of equal risk currently yields...

Debt issued by Drumpt corporation currently yields 11%. A municipal bond of equal risk currently yields 6%. At what marginal tax rate would an investor be indifferent between the two bonds? Please input the answer in decimal format.

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Expert Solution

Calculation of the marginal tax rate at which an investor would be indifferent between the bonds, let t

Generally the return from municipal bonds are exempt from federal taxes, so net return on municipal bond will be equal to gross return i.e. 6% - (A)

Net return on corporation bond = 11% x (1 - tax rate) - (B)

Equate A and B to calculate the value of t

6% = 11% x ( 1 - t )

6%/11 = 1 - t

t = 1 - 0.5455

t = 0.4545 or 45.45%

So, the marginal tax rate at which an inventor would be indifferent would be 0.4545.

jeff jeffy answered 2 years ago

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