Question

A 7-year municipal bond yields 4.8%. Your marginal tax rate (including state and federal taxes) is 27%. What interest rate on a 7 year corporate bond of equal risk would provide you with the same after-tax return? a.5.64% b.5.93% c.6.25% d.6.90% e.6.58%

Answer 1

Answer:

The correct answer is option (E).

Explanation:

According to the scenario, the given data are as follows:

Yield rate = 4.8%

Tax rate = 27%

So, we can use the following formula to calculate the interest rate :

= Yield rate / ( 1 - tax rate)

= 4.8% / (1 - 27%)

= 0.048 / ( 1 - 0.27)

= 0.048 / 0.73

= 0.06575

= 6.58%