Problem:
A corporate bond is selling for $950. It matures in a year, at which time the holder will receive $1,000. In addition, the bond will pay $50 in interest during the year. What would be the after-tax return on the bond to an investor in the 50% marginal income tax bracket? (Assume that capital gains do not receive preferential tax treatment.) What would be the after-tax return if the bond had been a tax-free municipal bond?