24) Corporate vs municipal bond A one-year corporate bond with a face value of $

Question

24) Corporate vs municipal bond A one-year corporate bond with a face value of $1,000 carries a yield-to-maturity of 6% APR. investor is considering buying this bond and his marginal income tax rate is 30%, what annual rate of return would he receive after tax? (3 points) a. If the If the investor corporate bond, what rate of return must the municipal bond promise the investor in order to make him/her indifferent between the above corporate and this municipal bond? (2 points) b. is also offered a one-year tax-exempt municipal bond that carries a similar risk as the above

Explanation / Answer

As corporate bonds are subject to taxes..so, after tax return=6*(1-30%)=4.2%

Now, if municipal bonds are tax exempt so I must get 4.2% to make me indifferent between corporate bond and municipal bond

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