Question

An investor purchases one municipal and one corporate bond that pay rates of return of 5% and 6.4% respectively. If the investor were in the 15% tax bracket, his after tax rates of return on the municipal and corporate bond would be respectively_______________?

Answer 1

Here the after-tax rates of return on the municipal bond = 0.05

and the after-tax rates of return on the corporate bond =0.064(1 - 0.15) = 0.0544 = 5.44%.