A client in the 35 percent marginal tax bracket is comparing a municipal bond that offers a 4.25 percent yield to maturity and a similar-risk corporate bond that offers a 5.10 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 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 a client in the 35 percent marginal tax bracket, the effective yield of the corporate bond after taxes is calculated as 5.10% * (1 - 0.35) = 3.315%, which is lower than the 4.25% yield of the municipal bond.

A Client in the 35 Percent Marginal Tax Bracket Is