Suppose that holding yield constant investors are indifferen

Suppose? that, holding yield? constant, investors are indifferent as to whether they hold bonds issued by the federal government or bonds issued by state and local governments? (that is, they consider the bonds the same with respect to default? risk, information? costs, and? liquidity). Suppose that state governments have issued perpetuities? (or consoles) with ?$73 coupons and that the federal government has also issued perpetuities with ?$73 coupons. If the state and federal perpetuities both have? after-tax yields of 6?%, what are their? pre-tax yields?? (Assume that the relevant federal income tax rate is 33.28?%.) The? pre-tax yield on the state perpetuity will be nothing?%. ?(Round your response to two decimal? places.)

Solution

ans...
Solution : After-tax yield = 6% and federal tax rate = 33.28%
Bond issued by minicipal and state authority are generally tax free and binds issued by federal government is taxed as federal income tax rate
Pre tax yield = After tax yield /(1- tax rate ) = 6% /(1-0.3328) = 8.99%