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Karen is a wealthy retired investment advisor who is in the 35 percent tax bracket. She has a choice between investing in a high-quality municipal bond paying 5 percent or a high-quality corporate bond paying 7 percent.

a. What is the after-tax return of each bond? Enter your answer as a percent, rounded to two decimal places.
Tax-exempt municipal bond: _______%
Corporate bond:_________ %

Respuesta :

Answer:

5% and 4.55%

Explanation:

The computation is shown below:

Given that

Tax rate = 35%

High-quality municipal bond rate = 5%

High-quality corporate bond rate = 7%

So, by the above information

The Tax-exempt municipal bond is the same that is given in the question i.e  5%

And, the after-tax return on the corporate bond is  

= Corporate bond interest rate × (1 - tax rate)

= 7%  × (1 - 0.35)

= 7% × 0.65

= 4.55%

Moreover, there is no interest earned on a municipal bond after coming of the sixteenth amendment

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