To calculate:
The yield that municipals should offer to an investor to prefer them over a corporate bond which offers a 9% yield when the investor is in the 30% combined tax bracket.
Introduction:
Municipal bonds are bonds offered by local and state governments to fund their projects. While these bonds are similar to the treasury bonds and corporate bonds, in the case of municipal bonds, the interest income that we get from these bonds are exempted from federal income
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- An investor purchases one municipal and one corporate bond that pay rates of return of 7.2% and 9.1%, respectively. If the investor is in the 15% marginal tax bracket, his or her after-tax rates of return on the municipal and corporate bonds would be ________ and ______, respectively. A. 6.12%;7.735% B. 7.2%;7.735% C. 7.2%;9.1% D. 8.471%;9.1%arrow_forwardAn investor purchases one municipal and one corporate bond that pay rates of return of 6% and 8%, respectively. If the investor is in the 24% marginal tax bracket, his or her after-tax rates of return on the municipal and corporate bonds would be ________ and ______, respectively. A) 6%; 8% B) 4.5%; 6% C) 4.5%; 8% D) 6%; 6.08%Please provide justificationarrow_forwardAn investor purchases one municipal and one corporate bond that pay rates of return of 7.2% and 9.1%, respectively. If the investor is in the 12% marginal tax bracket, his or her after-tax rates of return on the municipal and corporate bonds would be ________ and ______, respectively. A) 7.2%; 9.1% B) 7.2%; 8.008% C) 6.12%; 7.735% D) 8.471%; 9.1% Provide an accurate answer with justification.arrow_forward
- 1. You are in the 30% tax bracket (federal & state taxes combined). A corporate bond is yielding 9%. Assuming that all non-tax features (e.g. risk) are identical, what yield would a municipal bond ("Muni") have to offer in order for you to prefer it over the corporate?arrow_forwardAn investor is trying to decide between a muni paying 5.75% or an equivalent taxable corporate paying 8.25%. What is the minimum marginal tax rate the investor must have to consider buying the municipal bond? A. 30.00% B. 25.00% C. 66.67% D. 20.00%arrow_forwardAn investor is trying to decide between a muni paying 6.20 percent or an equivalent taxable corporate paying 8.25 percent. What is the minimum marginal tax rate the investor must have to consider buying the municipal bond? Group of answer choices 20.0 percent 66.7 percent 80.0 percent 25.0 percent 75.0 percentarrow_forward
- An investor is trying to decide between a muni paying 6.20 percent or an equivalent taxable corporate paying 8.25 percent. What is the minimum marginal tax rate the investor must have to consider buying the municipal bond? 20.0 percent 66.7 percent 80.0 percent 25.0 percent 75.0 percentarrow_forward4. a) There is a municipal bond in which we are interested in investing. How much should it pay to be competitive with a corporate bond paying 5%? b) If a corporation invests in preferred stock paying $10 and it has a tax rate of .4, what is the effective rate of return it makes?arrow_forwardAn investor purchases one municipal and one corporate bond that pay rates of return of 7.2% and 9.1%, respectively. If the investor is in the 15% marginal tax bracket, his or her and _, respectively. after-tax rates of return on the municipal and corporate bonds would be 7.2%;7.735% 8.471%:9.1% O 7.2%;9.1% 6.12%;7.735%arrow_forward
- the ratio of municipal bond yields to corporate bond yields the cutoff tax bracket 21. The the where more individuals will prefer to hold municipal debt. lower; lower lower; higher higher; higher higher; lowerarrow_forwardSuppose the interest rate on a taxable corporate bond is 7 percent while a municipal, tax exempt bond has an interest rate of 5 percent, and they are similar in every other way. Assuming the income tax rate is 30 percent, calculate the after tax interest rate on the corporate bond. Is it higher or lower than the after tax return on the municipal bond? What is the income tax rate that equalizes the after tax return between the corporate bond and the municipal bond.arrow_forwardIf a taxpayer's marginal tax rate is 33 percent, what is the after-tax yield on a corporate bond that pays 5 percent interest? If the average marginal tax rate of all taxpayers is 50 per- cent, will the taxpayer with the 33 percent marginal tax rate prefer a corporate or a mu- nicipal security? Assume equivalent safety and maturity.arrow_forward
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning