Corporate bonds issued by Johnson Healthcare currently yield 8 percent.
a. If an investor is in the 34 percent tax bracket, what is the bond's after-tax yield?
b. Municipal bonds of equal risk currently yield 6 percent. At what tax rate would an investor be indifferent between these two bonds?
c. Which bond should an investor in the 34 percent tax bracket invest in?
After-tax yield = Yield*(1-tax rate) =8%*(1-34%) = 5.28%
Indifference rate level = Municipal bond ...
This solution provides calculations for after-tax yield and tax rates.