Question
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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Economics of Money, Banking and Financial Markets
Authors: Frederic S. Mishkin
9th Edition
978-0321607751, 9780321599797, 321607759, 0321599799, 978-0321598905
