The relation between the interest rate of a municipal bond and a comparable corporate bond is as follows:
r_{m} = r_{c} ( 1  t )
where
r_{m} = interest rate of municipal bond r_{c} = interest rate of comparable corporate bond t = tax rate
For example if:
r_{c} = 10% t = 38%then
r_{m} = .10 (1  .38) = 6.2%
A municipal bond that pays 6.2% is comparable to a corporate bond that pays 10% (assuming all else is equal)
Search Encyclopedia

Featured Article
