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Breakeven Tax Rate

The amount of taxes to be paid (on a percentage basis) that would result in a neutral financial impact from a transaction.

Clair is thinking about investing in either Disney bonds with a coupon rate of 10%...or bonds issued by the city of Orlando that pay 8%.

As a Florida resident, she pays no state income tax, and income from municipal bonds is exempt from federal income tax, so Clair’s breakeven tax rate is 20% when comparing the two investments.

If she pays more than 20% in federal taxes, her net interest income from the Disney bond will be less than that of the Orlando bond, and vice versa.

Find other enlightening terms in Shmoop Finance Genius Bar(f)