At what point would an investor be indifferent between a Drifton corporate bond yielding 12.5 percent and a tax-free municipal bond of equal financial strength if the investor's marginal tax rate is 25 percent?
A) 6.05 percent
B) 7.10 percent
C) 8.15 percent
D) 9.38 percent
E) 16.27 percent

Question

Quizplus · Accepted Answer

To find the equivalent tax-free yield, divide the taxable yield by (1 - tax rate). So, 12.5% / (1 - 0.25) = 12.5% / 0.75 = 16.67%. None of the options match this calculation exactly, but the question seems to have been misinterpreted. The correct calculation for the equivalent yield of a tax-free bond should be: 12.5% * (1 - 0.25) = 9.375%, which is closest to option D, 9.38%.

At What Point Would an Investor Be Indifferent Between a Drifton