Question

An investor purchases one municipal bond and one corporate bond that pay rates of return of 9% and 10.4%, respectively. If the investor is in the 15% tax bracket, his after-tax rates of return on the municipal and corporate bonds would be, respectively, _____. A. 9% and 8.84% B. 10.35% and 8.84% C. 7.65% and 10.4% D. 9% and 10.4%

Answer 1

Answer:

Correct option is  A. 9% and 8.84%

Explanation:

given data

municipal bond = 9 %

corporate bond = 10.4 %

tax bracket = 15 %

solution

we get here first after-tax rates of return on the municipal that is

On Municipal bond, no taxes are levied. hence after tax rate of return will be 9%

and

now we get here first after-tax rates of return, On Corporate bond that is

On Corporate bond, after tax rate of return = 10.4% × (1-0.15)

On Corporate bond, after tax rate of return = 8.84%

so correct option is  A. 9% and 8.84%