Calculate the after-tax return of a 6.09 percent, 20-year, A-rated corporate bon

Question

Calculate the after-tax return of a 6.09 percent, 20-year, A-rated corporate bond for an investor in the 15 percent marginal tax bracket. Compare this yield to a

5.71 percent, 20-year, A-rated, tax-exempt municipal bond and explain which alternative is better. Repeat the calculations and comparison for an investor in the

35 percent marginal tax bracket.

Question - The after-tax return of a 6.09 percent, 20-year, A-rated corporate bond for an investor in the 15 percent marginal tax bracket is ? %.(Round to two decimal places.)

Explanation / Answer

After tax return = Interest rate * (1 - Tax rate)

Interest rate = 6.09%

Tax rate = 15%

After tax return = 6.09% * (1 - 15%) = 5.18%

5.18 % lower than 5.71% of muncipal bond, hence investing in municpal bond is better.

If

Tax rate = 35%

After tax return = 6.09% * (1 - 35%) = 3.96%

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