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2 July, 19:05

Suppose you want to invest $10,000. You have two options: (1) Invest in California municipal bonds with an expected rate of return of 13.00%, or (2) invest in J and K Corp.'s bonds with an expected rate of return of 19.50%. Assume that your decision is based on a tax perspective. If everything else is the same for both bonds, at what tax rate would you be indifferent between these two bonds?

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  1. 2 July, 19:31
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    a tax-rate for 33.33% will make both investment yield an equal return after-taxes

    Explanation:

    the municipal bonds aare tax free, while the J and K Corp.'s bond are subject to tax income.

    threfore to be indifferent between these bonsd the tax rate will equal the corp bon rate after taxes with the municipal bond:

    pretax x (1 - t) = after tax

    0.195 x (1-t) = 0.13

    1 - 0.13/0.195 = t

    t = 1/3 = 33.33%
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