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The Vermont General Bank has purchased a bank-qualified municipal bond with a coupon rate of 8%. The bank had to borrow the funds (took a

The Vermont General Bank has purchased a bank-qualified municipal bond with a coupon rate of 8%.

The bank had to borrow the funds (took a loan) to make this purchase at a cost of 5% (the loan rate was 5%). Assume they can deduct 81% of the interest expenses from this loan from their taxable income.

The bank is in the 27% tax bracket.

What is the net after-tax return on this bank-qualified municipal bond?

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