In order for you to be indifferent between the after-tax returns on a corporate bond paying 9% and a tax-exempt municipal bond paying 7%, what would your tax bracket need to be?
A) 17.6%
B) 27%
C) 22.2%
D) 19.8%
E) Cannot be determined from the information given.

Question

Quizplus · Accepted Answer

To be indifferent, the after-tax return on the corporate bond must equal the return on the municipal bond. The formula is: Corporate Bond Rate * (1 - Tax Rate) = Municipal Bond Rate. Solving for the tax rate: 9% * (1 - Tax Rate) = 7%, gives a tax rate of 22.2%.

In Order for You to Be Indifferent Between the After-Tax