Question

A bond issued by the State of Pennsylvania provides a 9% yield. What yield on a Synthetic Chemical Company bond would cause the two bonds to provide the same after-tax rate of return to an investor in the 35% tax bracket

Answer 1

Answer:

13.85%

Explanation:

Steps taken in solving bonds that provide the same tax after tax rate of return to an investor at 35% tax bracket

RATIONALE: Municipal bond yield 9.00%

Tax rate 35.00%

Municipal yield = After-tax bond yield 9.00% = BT yield × (1 − T) 9.00% = BT yield × 65.00%

BT yield = 13.85%