Lochmere Corporation is evaluating a taxable bond at 7% and a municipal bond at 5.75%. What is the break-even tax rate?

Multiple Choice

88%

82%

44%

18%

12%

The break-even tax rate is the rate at which the after-tax yield of the taxable bond equals the yield of the municipal bond.

To calculate it, we use the formula:

\[
\text{Break-even tax rate} = 1 - \frac{\text{Municipal bond yield}}{\text{Taxable bond yield}}
\]

Given:
- Taxable bond yield = 7%
- Municipal bond yield = 5.75%

Now, applying these values:

\[
\text{Break-even tax rate} = 1 - \frac{5.75\%}{7\%} = 1 - 0.8214 = 0.1786 \approx 18\%
\]

So, the break-even tax rate is **18%**.

Would you like more details or have any questions?

Here are 5 related questions:
1. How is the after-tax yield of a taxable bond calculated?
2. What factors influence the choice between municipal and taxable bonds?
3. How does a bond’s tax-exempt status affect its yield?
4. What is the impact of different tax brackets on bond investment decisions?
5. How can inflation influence bond yield comparisons?

**Tip**: Taxable bonds generally offer higher yields to compensate for the taxes, but municipal bonds may be more advantageous in higher tax brackets.

Lochmere Corporation is evaluating a taxable bond at 7% and a municipal bond at 5.75%. What is the break-even tax rate?

Learn how to calculate the break-even tax rate when comparing a taxable bond at 7% and a municipal bond at 5.75%. This problem covers key finance math concepts such as yield comparison and percentage calculations, suitable for students in Grades 11-12 and college-level finance courses.

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