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5 October, 15:49

An investor is in a 30% combined federal plus state tax bracket. If corporate bonds offer 9% yields, what yield must municipals offer for the investor to prefer them to corporate bonds?

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  1. 5 October, 17:25
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    0.063 or 6.3% (or more)

    Explanation:

    Given:

    Combined Tax Bracket = 30% = 30/100 = 0.30

    Yields of corporate Bonds = 9% = 9/100 = 0.09

    Yield to Shift Investors to choose municipal bonds = ?

    Calculation:

    Yield from corporate bond = (After tax yield) x Yield rate of corporate Bonds

    = (0.70) x (0.09)

    = 0.063 or 6.3%

    Working note:

    After tax yield = (1 - tax rate)

    After tax yield = (1 - 0.30)

    After tax yield = (0.70)

    so, they must give 6.3% yield
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