Sally is choosing between two bonds both of which mature in 15 years and have the same level of risk. Bond A is a municipal bond that yields 5.15%. Bond B is a corporate bond that yields 7.15%. If Sally is in the 28% tax bracket, which bond should she select and why?
A) Sally should select Bond A because its interest income is not taxable.
B) Sally will be indifferent between Bond A and B since the taxable equivalent yield of Bond A equals the yield of Bond B.
C) Sally should select Bond A because its taxable equivalent yield is greater than the yield of Bond B.
D) Sally should select Bond B because the taxable equivalent yield of Bond A is less than the yield of Bond B.

Question

Quizplus · Accepted Answer

The taxable equivalent yield of Bond A is equal to the yield of Bond B, so Sally will be indifferent between the two bonds.

Sally Is Choosing Between Two Bonds Both of Which Mature