A5-year corporate bond yields 9.50%. a 5-year municipal bond of equal risk yields 6.5%. assume that the state tax rate is zero. at what federal tax rate are you indifferent between the two bonds? (round your final answer to two decimal places.)

a. 37.89%
b. 35.37%
c. 38.53%
d. 36.95%
e. 31.58%

31.58%

Explanation:

To work this out, then we must calculate the federal tax rate.

Given; Bond yield = 9.50%

           Risk yield = 6.50%

Risk yield = Bond yield * (1- Federal tax rate)

    6.50% =  9.50% * (1- Federal tax rate)

(1- Federal tax rate) =

Federal tax rate = 1 -

                       = 1 - 0.6842

                        = 0.3158 *100

                        = 31.58%

At a federal rate of 31.58%, I would be indifferent between the two.

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