Bond Interest 9A9Ca6

1. **State the problem:** Bill wants to be indifferent between a corporate bond and a municipal bond. The corporate bond pays $8\%$ interest, and Bill's marginal tax rate is $32\%$. We need to find the interest rate of the municipal bond that makes Bill indifferent. 2. **Formula used:** The after-tax return on the corporate bond is given by: $$\text{After-tax return} = \text{Corporate bond interest rate} \times (1 - \text{Tax rate})$$ Bill will be indifferent if the municipal bond interest rate equals the after-tax return of the corporate bond because municipal bond interest is typically tax-exempt. 3. **Calculate the after-tax return on the corporate bond:** $$8\% \times (1 - 0.32) = 8\% \times 0.68 = 5.44\%$$ 4. **Interpretation:** Bill would be indifferent if the municipal bond pays $5.44\%$ interest. 5. **Check the options:** - $32.00\%$ - too high - $10.40\%$ - too high - $8.00\%$ - equal to corporate bond before tax - $7.00\%$ - higher than after-tax return - None of the choices are correct Since $5.44\%$ is not listed, the correct answer is **None of the choices are correct**.