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6 December, 06:18

An 4.75 percent coupon bond issued by the State of Washington sells for $1,000. What coupon rate on a corporate bond selling at $1,000 par value would produce the same after tax return to the investor as the municipal bond if the investor is in the 28 percent marginal tax bracket?

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  1. 6 December, 09:48
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    6.6%

    Explanation:

    Data provided as per the question

    Coupon bond percentage = 4.75%

    Investor percentage = 28%

    The computation of coupon rate of the corporate bond is given below:-

    Coupon rate of the corporate bond = Coupon bond percentage : (1 - Investor percentage)

    = 4.75% : (1 - 0.28)

    = 4.75% : 0.72

    = 6.6%

    Therefore for computing the Coupon rate of the corporate bond we simply applied the above formula.
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