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Municipal bonds are currently offering investors a 10% return and corporate bonds with the same maturity and default risk are offering investors a 12% return.

Municipal bonds are currently offering investors a 10% return and corporate bonds with the same maturity and default risk are offering investors a 12% return. Municipal bonds are exempt from personal income tax while corporate bonds are not. (a) What is the after-tax return on municipal bonds for an investor in the 30% personal income tax bracket? (b) What is the after-tax return on corporate bonds for an investor in the 30% personal income tax bracket? (c) At what personal income tax rate would an investor be indifferent between corporate bonds and municipal bonds?

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