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?

Question

Quizplus · Accepted Answer

Since the client is in the 33% marginal tax bracket, the effective tax rate on the corporate bond is 33% x (1-0.85) = 5.55%. Therefore, the after-tax yield on the corporate bond is 6.25% - 5.55% = 0.70%. On the other hand, the municipal bond is tax-exempt, so the after-tax yield is simply the stated yield of 5%. Therefore, the municipal bond will provide a higher after-tax profit for the client.

A Client in the 33 Percent Marginal Tax Bracket Is