Question

The break-even tax rate between a taxable corporate bond yielding 7 percent and a comparable nontaxable municipal bond yielding 5 percent can be expressed as ___________.
A. 0.05 / (l-t*) = 0.07
B. 0.05 - (l-t*) = 0.07
C. 0.07 + (l-t*) = 0.05
D. 0.05 x (l-t*) = 0.07
E. 0.05 x (l+t*) = 0.07

Answer 1

Answer:D. 0.05 x (l-t*) = 0.07

Explanation: The break even tax rate is the tax rate at which industry players don't find it advantageous or disavantageous to invest in an economy, any tax rate higher than the break even tax rate will cause investors to loss certain amount of profits.

A tax rate below the break even tax rate will cause investors to want to make investment decisions as it will be beneficial and profitable to invest more money into the economy.

Calculation:

7/100=5/100(I-t*),the break even tax rate can be expressed as

=0.07=0.05*(I-t).