Question

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

Answer 1

on municipal bond after tax rate of return = 5 percent

on corporate bond after tax rate of return = 5.44 percent

Step-by-step explanation:

given data

rates of return = 5% = 0.05

rates of return = 6.4% = 0.064

tax bracket = 15% = 0.15

solution

first we get on municipal bond yield

municipal bond is tax exempt so

as on municipal bond there is no taxes is levied

so that here after tax rate of return will be as 5 percent

and

now we get after tax yield on corporate bond that is

after tax rate of return = rates of return × ( 1 - tax bracket ) .............1

after tax rate of return = 6.4% × ( 1 - 15%)

after tax rate of return = 0.064 × ( 1 - 0.15 )

after tax rate of return = 5.44 percent