Question

A municipal bond has yield to maturity of 4.89 percent. a comparable corporate bond has yield to maturity of 6.70 percent. at what marginal tax rate will an investor be indifferent between these two bonds?

Answer 1

If the corporate bond yields 6.7% and is taxed at 27% there is no effective difference in yield; it would bring the yield down to 4.89%. There would be no difference between a tax free municipal bond or a taxable corporate bond in this scenario.