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The coupon rate on a tax-exempt bond is 5.6%, and the rate on a taxable bond is
The coupon rate on a tax-exempt bond is 5.6%, and the rate on a taxable bond is 8%.Both bonds sell at par. The tax bracket (marginal tax rate) at which an investor would be indifferent between the two bonds is:
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The formula for this problem would be:
T(tax rate)= 1 - ( Rm*rate of muni / r*rate of corporate bond ) T = 1 - (.056 / .08) T = 1 - .7 T = .3 or 30% tax bracket would make the investor indifferent ( meaning it wouldn't matter which bond the investor chose because with a 30% tax bracket the bonds would yield the same income. hope it helps. |
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