Problem:
Municipal bonds are currently offering investors a 6% return and corporate bonds with the same maturity and default risk are offering investors an 8% return.
Task:
Question 1: What is the after-tax return on municipal bonds for an investor in the 30% tax bracket?
Question 2: What is the after-tax return on corporate bonds for an investor in the 30% tax bracket?
Question 3: At what personal tax rate would an investor be indifferent between corporate bonds and municipal bonds? Justify your answer with the appropriate computations.