X Problem P5-9 (similar to) Question Help
Based on the after-tax retums, at what federal tax rate (as shown in Chapter 4) is an investor better off choosing a tax-exempt 7 16 percent municipal bond over a
taxable 10.39 percent corporate bond?
The after-tax retum on the corporate bond when the tax rate is 10% is %

The after-tax rate for the Corporate Bond when the tax rate is 10% is 9.35%

Step-by-step explanation:

The investor is better of at any rate above 30%, i.e 31% of tax rate would give the investor 7.1691% return ( 10.39  −  ( 10.39  ⋅  31 % ) )

Thus the return from the tax exempt municipal bond would be higher than the return from the taxable corporate bond.

The after-tax rate for the Corporate Bond when the tax rate is 10% is 9.35%( 10.39  −  ( 10.39  ⋅  10 % ) )

geometry: triangles

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call the larger triangle abc

then the smaller triangle cde is similar to abc (all angles are equal, aaa).  

ab is the side that is 36, and we wish to find de, the side corresponding to ab

area_cde = area_abc - area_cde --> area_abc / area_cde = 2

let x=length of de

ratio of areas = (ratio of sides)^2

+2+=+%2836%2fx%29%5e2+

+2+=+1296%2fx%5e2+

++x%5e2+=+1296%2f2+=+648+

25.45584