Assignment:
If the before-tax rate of return on a riskless fully taxable bond is 7% and the before-tax rate of return on a riskless tax-favored asset is 5%, what is the implicit tax rate on the tax-favored asset? If a tax-exempt riskless asset earns a before-tax rate of return of 4%, what is the explicit tax rate for the marginal investor on the riskless tax-favored asset that returns 5%?
Provide complete and step by step solution for the question and show calculations and use formulas.