Lester is considering a municipal bond yielding 5.5% and a corporate bond yielding 8.2%. His marginal tax rate is 28%. He should invest in the ________ bond because the critical marginal tax rate is ________ %.

Question

Quizplus · Accepted Answer

The critical marginal tax rate is calculated as 1 - (municipal bond yield / corporate bond yield) = 1 - (5.5% / 8.2%) = 33%. Since Lester's marginal tax rate is 28%, which is less than 33%, he should invest in the corporate bond.

Lester Is Considering a Municipal Bond Yielding 5