Comparing Bond Yields 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?

Question

Quizplus · Accepted Answer

Since the client is in the 35 percent marginal tax bracket, the tax-equivalent yield for the municipal bond would be:

4.25%/(1-0.35) = 6.54%

This means that the municipal bond effectively yields 6.54% to the client after taxes. Therefore, the client would earn more profit after taxes from the municipal bond, which is offering a higher effective yield.

Comparing Bond Yields a Client in the 35 Percent Marginal