Suppsoe that a corporate bond with a Baa credit rating and five years to maturit

Question

Suppsoe that a corporate bond with a Baa credit rating and five years to maturity has a yield to matuity of 8 percent. Suppose that the goverment of the city of Udellum, wich has a Baa credit ratng issues a bond with the same time to maturity in a market that is just as liquid as the market for corporate bonds. Suppose that investors have a federal tax rate of 30 percent. Calculate the iterest rate that Udwellum should pay on its bonds if they will yield the same after-tax rate of return to ivestors as comparable corporate bonds. Show work.

Explanation / Answer

Interest rate = 8/30*100 = 26.67 %

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