Suppose that the interest rate on a taxable corporate bond is 9% and that the marginal tax is 25%. Suppose a tax-free municipal bond with a rate of 6.45% were available.
What is the tax-free equivalent municipal interest rate to this corporate bond?--------------%
Note Equi. Tax-free rate = corp. interest rate*(1 - tax rate)
Which security would you invest in, corporate bond or tax-free muni. bond?-------------bond