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 answer.

Question

Quizplus · Accepted Answer

Since the client is in the 28 percent marginal tax bracket, the tax-equivalent yield (TEY) of the municipal bond is 4.51 percent (3.25% / (1 - 0.28)). This means that the municipal bond offers a higher yield after taxes than the corporate bond, which has a yield of 4.10 percent. Therefore, the municipal bond will give the client more profit after taxes.

A Client in the 28 Percent Marginal Tax Bracket Is