Chapter 2, Problem 5CP

Summary Introduction

To calculate: The tax bracket or the Marginal tax rate at which the investor will be indifferent between the taxable bond and tax-exempt bonds.

Introduction:

Marginal tax rate: Income of individual is taxable if it crosses the limit imposed by the Government. So, Government decides some tax brackets which consist of tax percentages which will be imposed on tax payers if they qualify the income range. This tax percentage are called Marginal tax rate.

Tax-exempt bond: An investor is given certain bonds stating the rate of interest payable to him for a fixed tenure. When a tax is not charged on the income of bond then it is called tax-exempt bond.

Taxable bond: When an investors receives some bonds which as taxable under the Income tax laws approved by the Government, then these are called taxable bonds.