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Zorluk: Çok zorGovernment, Municipal, and Corporate Bonds

An investor in a 35%35\% federal income tax bracket and a 5%5\% state income tax bracket is evaluating a taxable corporate bond with a yield of 7.20%7.20\%. The investor is considering purchasing an out-of-state municipal bond instead. In the investor's home state, interest income from out-of-state municipal bonds is subject to state income tax, but remains exempt from federal income tax. What is the minimum yield percentage (rounded to two decimal places) that the out-of-state municipal bond must pay to offer an after-tax yield equivalent to that of the corporate bond?

Cevap: 4.55 %

Cevap

The out-of-state municipal bond must offer a minimum yield of 4.55%4.55\%.
To find the equivalent yield of an out-of-state municipal bond, first compute the net after-tax yield of the corporate bond. Corporate bond interest is subject to both federal (35%35\%) and state (5%5\%) taxes, making the combined tax rate 40%40\%. The corporate bond's after-tax yield is 7.20%×(1−0.40)=4.32%7.20\% \times (1 - 0.40) = 4.32\%. Interest from out-of-state municipal bonds is exempt from federal tax but subject to the 5%5\% state tax. Setting the municipal bond's after-tax yield equal to 4.32%4.32\% gives Y×(1−0.05)=4.32%Y \times (1 - 0.05) = 4.32\%. Solving for YY yields Y=4.32%0.95=4.547368%Y = \frac{4.32\%}{0.95} = 4.547368\%, which rounds to 4.55%4.55\%.

Adım Adım Çözüm

1
Determine the combined marginal tax rate applicable to fully taxable corporate bond interest.
Combined tax rate = 35%+5%=40%35\% + 5\% = 40\%.
Interest earned on corporate bonds is fully taxable at both federal and state income tax levels.
2
Calculate the net after-tax yield of the corporate bond.
After-tax yield = 7.20%×(1−0.40)=4.32%7.20\% \times (1 - 0.40) = 4.32\%.
The investor retains 60%60\% of the gross corporate yield after satisfying both tax obligations.
3
Identify the tax status of out-of-state municipal bond interest for this investor.
Applicable tax rate = 5%5\% state income tax (0%0\% federal tax).
Municipal bond interest earned from out-of-state issuers is exempt from federal income tax but subject to state income tax in the resident's home state.
4
Solve for the gross municipal yield required to deliver a 4.32%4.32\% net after-tax return.
Required municipal yield = 4.32%1−0.05=4.32%0.95≈4.55%\frac{4.32\%}{1 - 0.05} = \frac{4.32\%}{0.95} \approx 4.55\%.
Dividing the net required return by (1−state tax rate)(1 - \text{state tax rate}) determines the nominal yield the municipal bond must pay.

Anahtar Kavram

Tax Treatment of Out-of-State Municipal Bonds vs. Corporate Bonds
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Konular

Government, Municipal, and Corporate Bonds

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