A client in the 28 percent marginal tax bracket is comparing a municipal bond that offers a 3.25 percent yield to maturity and a similar-risk corporate bond that offers a 4.10 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 the answer.First determine the ETY:

Question

Quizplus · Accepted Answer

Since the client is in the 28 percent marginal tax bracket, the after-tax yield of the municipal bond would be 3.25% * (1-0.28) = 2.34%. Whereas, the after-tax yield of the corporate bond would be 4.10% * (1-0.28) = 2.95%. However, since the municipal bond is tax-exempt, the client does not have to pay taxes on the interest earned, while the interest earned on the corporate bond is taxable. Therefore, the municipal bond will give the client more profit after taxes.

A Client in the 28 Percent Marginal Tax Bracket Is