Question

calculate the after tax return of a 11.23 percent, 20 year, a-rated corporate bond for an invested in the 15 percent marginal tax bracket. Compare this yield to a 7.09 percent, 20 year, a-rated, tax exempt municipal bond amd explain which alternative is better. repeat the calculation amd comparison for an investor in the 33 percent marginal tax bracket.

The after-tax return of a 11.23 percent, 20 year, a -rated corporate bond for an investor in the 15 percent marginal tax bracket is _____% ( round to two decimal places)

Answer 1

Answer:

Corporate Bond:

After tax return of a 11.23 percent, 20 year, a-rated corporate bond in the 15 percent marginal tax bracket

= Before tax rate of return * (1 - Tax rate)

= 11.23% * (1 - 15%)

= 9.55%

Hence:

The after-tax return of a 11.23 percent, 20 year, a -rated corporate bond for an investor in the 15 percent marginal tax bracket is 9.55 %

Tax exempt municipal bond

After tax return of 7.09 percent, 20 year, a-rated, tax exempt municipal bond = 7.09%

Comparison:

Corporate bond is better.

Yield of corporate bond is 9.55% which is higher than yield of tax exempt municipal bond which is 7.09%

When marginal tax bracket = 33%

After tax return of a 11.23 percent, 20 year, a-rated corporate bond = 11.23% * (1 - 33%) = 7.52%

Even when marginal tax rate is 33%, corporate bond is better. In this case yield of corporate bond is 7.52% which is higher than yield of tax exempt municipal bond which is 7.09%