You have a choice between investing in a corporate bond or a municipal bond. The corporate bond has an
annual yield of 10 percent, while the municipal bond has an annual yield of 7 percent.
At what tax rate would
you be indifferent between buying the corporate bond or the municipal bond?
Before-tax equivalent yield on municipal bond = .07 (1 - tax rate)
Before-tax yield on corporate bond = .10
.10 = .07 : Tax Rate = 1 - (.07/.
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