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Investing and Financial Markets
Taxes and Tax Preparation
Income Taxes
Bonds and Treasuries

A 5-year corporate bond yields 8 percent a 5-year municipal bond of equal risk yields 6 percent the state tax rate is 0 at what federal tax rate are you indifferent between bonds?

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May 10, 2009 9:07PM

To find the federal tax rate at which the buyer would be indifferent between Muni bonds(which are tax free) and Corporate bonds(which fall under your tax bracket tax rate) you follow this simple formula: Corporate Bond Yield=(Municipal bond Yield)/(1- Federal tax rate) In this case you would solve for the Federal Tax Rate and get an answer of .25 or 25% http://luhman.org/Nts/Bond/140_Municipals.html