A client in the 35 percent marginal tax bracket is comparing a municipal bond that offers a 4.25 percent yield to maturity and a similar-risk corporate bond that offers a 5.10 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 answer.First determine the ETY:

Question

Quizplus · Accepted Answer

The client's tax bracket is 35 percent, so the tax-equivalent yield (ETY) of the municipal bond is 4.25 / (1 - 0.35) = 6.54 percent. This is higher than the yield of the corporate bond (5.10 percent), so the municipal bond will give the client more profit after taxes.

A Client in the 35 Percent Marginal Tax Bracket Is