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6 May, 00:05

A municipal bondholder buys a 5 percent coupon annual payment muni bond at a price of $4,900. The bond has a $5,000 face value. In one year she sells the bond for $4,975. The appropriate capital gains tax rate is 15 percent and her ordinary income tax rate is 28 percent.

A. What is her after-tax rate of return?

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  1. 6 May, 00:25
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    the after tax return on the investment is 6.40%

    Explanation:

    5% interest on the face value: 5,000 x 5% = 250 this interest are tax exempt.

    capital gain:

    4,975 - 4,900 = 75

    75 x 15% = 11.25

    net return: 75 - 11.25 = 63.75

    total return: 250 + 63.75 = 313.75

    investment 4,900

    313.75 / 4900 = 0,064030 = 6.40%
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