Question

An investor is in a 30% combined federal plus state tax bracket. If corporate bonds offer 8.75% yields, what yield must municipals offer for the investor to prefer them to corporate bonds

Answer 1

6.125%

Step-by-step explanation:

Calculation for what yield must municipals offer for the investor to prefer them to corporate bonds

The after-tax yield on the corporate bonds is: 8.75% x (1 - 0.30)

The after-tax yield on the corporate bonds is= 0.0875x 0.7

The after-tax yield on the corporate bonds is= 0.06125*100

The after-tax yield on the corporate bonds is= 6.125%

Therefore what yield must municipals offer for the investor to prefer them to corporate bonds is

6.125%