Assume a municipal bond is issued by the State of New York. Its yield is stated at 6%. A taxable corporate bond of equivalent quality is yielding 9%. You are in the 35% tax bracket and your son is in the 10% tax bracket. Which would be the correct investment strategy for both you and your son?

Question

Quizplus · Accepted Answer

To determine the best investment strategy, we calculate the tax-equivalent yield for the municipal bond for both tax brackets. For you, in the 35% tax bracket, the tax-equivalent yield is 6% / (1 - 0.35) = 9.23%. For your son, in the 10% tax bracket, it's 6% / (1 - 0.10) = 6.67%. Since the corporate bond yields 9%, it's better for your son (higher yield after tax), but the municipal bond is better for you (higher yield after considering your tax rate).

Assume a Municipal Bond Is Issued by the State of New