Assume that John's marginal tax rate is 17 percent. If a city of Austin bond pays 10.2 percent interest, what interest rate would a corporate bond have to offer for John to be indifferent between the two bonds
Municipal bonds are tax exempt and so are attractive for this reason. If John is to be indifferent between the two, the corporate bond would have to offer a return that when adjusted for tax, will give the same return as the municipal bond.
