A client in the 28 percent marginal tax bracket is comparing a municipal bond that offers a 3.25 percent yield to maturity and a similar-risk corporate bond that offers a 4.10 percent yield. Which bond will give the client more profit after taxes?
A) the municipal bond.
B) the corporate bond.
C) Both give the client equal profits after taxes.
D) There is not enough information given to determine the answer.

Question

Quizplus · Accepted Answer

The municipal bond offers more profit after taxes because the interest from municipal bonds is generally exempt from federal income taxes. For the corporate bond, the after-tax yield is calculated as the yield times (1 - tax rate), which is 4.10% * (1 - 0.28) = 2.952%. Since 3.25% (municipal bond yield) is greater than 2.952% (after-tax corporate bond yield), the municipal bond is more profitable for the client.

A Client in the 28 Percent Marginal Tax Bracket Is