Municipal bonds are currently offering investors a 10% return and corporate bonds with the same maturity and
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Question:
Municipal bonds are currently offering investors a 10% return and corporate bonds with the same maturity and default risk are offering investors a 12% return. Municipal bonds are exempt from personal income tax while corporate bonds are not.
(a) What is the after-tax return on municipal bonds for an investor in the 30% personal income tax bracket?
(b) What is the after-tax return on corporate bonds for an investor in the 30% personal income tax bracket?
(c) At what personal income tax rate would an investor be indifferent between corporate bonds and municipal bonds?
Related Book For
Economics of Money, Banking and Financial Markets
ISBN: 978-0321598905
9th Edition
Authors: Frederic S. Mishkin
Posted Date: