Comparing Bond Yields 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?
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.

Question

Quizplus · Accepted Answer

Municipal bond interest is generally tax-exempt at the federal level, and sometimes at the state and local level as well. For a taxpayer in the 33 percent marginal tax bracket, the equivalent before-tax yield of a 5 percent municipal bond would be 7.46 percent (5 percent divided by [1 - 0.33]). In comparison, the 6.25 percent corporate bond would have an equivalent before-tax yield of 9.33 percent (6.25 percent divided by [1 - 0.33]). Since the municipal bond has a higher equivalent before-tax yield, it would provide more profit after taxes for the client.

Comparing Bond Yields a Client in the 33 Percent Marginal