Comparing Bond Yields A client in the 33 percent marginal tax bracket is comparing a municipal bond that offers a 5 percent yield to maturity and a similar-risk corporate bond that offers a 6.25 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.

Question

Quizplus · Accepted Answer

Municipal bond interest is generally exempt from federal income tax and sometimes from state and local taxes as well, which means the client in the 33 percent marginal tax bracket will not have to pay taxes on the interest earned from the municipal bond. On the other hand, the client will have to pay taxes on the interest earned from the corporate bond. Therefore, the after-tax yield on the municipal bond will be higher and it will generate more profit for the client.

Comparing Bond Yields a Client in the 33 Percent Marginal