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.

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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