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An investor is in a 40% combined federal plus state tax bracket. If corporate bonds offer...

An investor is in a 40% combined federal plus state tax bracket. If corporate bonds offer 8.00% yields, what yield must municipals offer for the investor to prefer them to corporate bonds? (Round your answer to 2 decimal places.)

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Expert Solution

Corporates bonds are taxable and Municipal bonds are tax exempt or tax free.

After tax Yield on Corporate bonds = Corporate bond Yield *(1-tax rate )

=>After tax Yield on Corporate bonds= 8% * (1-40%) = 8% * (1-0.40) = 8%*0.60= 4.8%

Municipal should offer yield at least equal to the after tax yield on the corporate bond , to prefer them to corporate Bond.

Correct Answer = 4.80%.

jeff jeffy answered 2 years ago
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