An investor is in a 40% combined federal plus state tax bracket. If corporate bonds offer 10.25% yields, what yield must municipals offer for the investor to prefer them to corporate bonds?

Municipal should offer at least 6.15 % after tax yield to the investor prefer them to corporate bond

Explanation:

We have given yield rate of corporate bond = 10.25%

Tax rate for investor = 40 %

Actual yield earned by investor will be equal to = yield rate of corporate bond * (1 - tax rate of investor)

= 0.1025 (1 - 0.40)

= 0.1025 * 0.60

= 0.0615

For converting in percentage we have to multiply with 100

So actual yield earned by investor will be equal to 6.15 %

So municipal should offer at least 6.15 % after tax yield to the investor prefer them to corporate bond