Emily is comparing two bonds that she is thinking about purchasing. One is a mun

Question

Emily is comparing two bonds that she is thinking about purchasing. One is a municipal bond issued by her home state with a 4% yield that would be free from both federal and state taxation. Emily is in the 25% federal tax bracket and the 5% state tax bracket. What would a fully-taxable corporate bond have to yield in order to produce the same after-tax return as the 4% municipal bond? Show work including intermediate steps. Express your answer as a percentage rounded to two decimal places. (Hint: You cannot base the answer on the sum of the tax rates. Use the appropriate equation.)

Explanation / Answer

Solution:

After State tax 4% 4 % = 95%, 100 % = 4.21% After fedral tax , before state tax 4.21% 4.21 % = 75 %, 100 % =4.21 %/ 75% 5.61% Before federal and state tax, rate must be 5.61 %

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