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What would be your highest marginal tax rate for you to prefer a corporate bond paying...

What would be your highest marginal tax rate for you to prefer a corporate bond paying 7.62% to a tax-exempt municipal bond paying 5%

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Expert Solution

To Calculate the tax rate, We will use equation

Corporate Bond Coupon * ( 1 - Tax rate) = Municipal Bond rate

0.0762*(1-t) = 0.05

0.0762 - 0.0762 t = 0.05

0.0762-0.05= 0.0762t

0.0262 = 0.0762 t

t = 0.0262/0.0762

t = 0.3438

Tax rate = 0.3438 or 34.38%

The maximum tax rate is 34.38% on which the investor will be indifferent for both of the bonds.

jeff jeffy answered 2 years ago
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