If an investor has a tax rate on interest income of 30% and the inflation rate is 4%,which bond has the highest expected real after-tax interest rate?

Question

Quizplus · Accepted Answer

Municipal bonds are often tax-exempt, meaning the investor does not pay taxes on the interest income. Therefore, the real after-tax interest rate for the municipal bond is 6% - 4% = 2%. For the other bonds, taxes reduce the nominal rate before adjusting for inflation, resulting in lower real after-tax rates.

If an Investor Has a Tax Rate on Interest Income