Answer:
14.29% or higher
Explanation:
Municipal bonds interest rates are tax free. Corporate bond rates however are have tac benefits through tax shield.
The formula for aftertax corporate bond rate = pretax rate(1-tax)
pretax rate = 7% or 0.07 as a decimal
aftertax rate(to be indifferent between the two) = 6% or 0.6
In order to be indifferent, the tax rate would be;
0.07 ( 1- tax ) = 0.06
0.07 - 0.07tax = 0.06
0.07 - 0.06 = 0.07tax
0.01 / 0.07 = tax
tax = 0.1429 or 14.29%
Therefore, Investors with a tax rate of 14.29% or higher would prefer the municipal bond.
