000
|
Corporate interest rate |
10% |
|
Municipal interest rate |
7% |
|
Tax Rate |
25.0% |
After-tax interest |
Corporate = |
Pre-tax interest – tax on interest |
= |
Muni = |
Pre-tax interest |
= |
|
There is no tax on the muni |
Tax rate at which you would be indifferent |
After-tax yield on muni versus corp bond |
Muni Yield = |
Corp Yield *(1-Tax rate) |
Solve for T |
Tax rate = |
1 – (Muni yield / Corp yield) |
Tax Rate = |