An investor is in a 30% combined federal plus state tax bracket. If corporate bonds offer 9% yields, what yield must municipals offer for the investor to prefer them to corporate bonds? (Round your answer to 1 decimal place.)

after tax yield on corporate bonds = 6.3 %

Explanation:

given data

federal plus state tax bracket = 30%

corporate bonds yields = 9%

solution

we get here yield that must municipals offer for the investor is express as

after tax yield on corporate bonds = corporate bonds yields * (1 - federal plus state tax bracket) ... 1

put here value and we will get

after tax yield on corporate bonds = 9% * (1 - 30%)

after tax yield on corporate bonds = 0.09 * (1 - 0.30)

after tax yield on corporate bonds = 0.063

after tax yield on corporate bonds = 6.3 %