The Nash Corp. is considering four investments. Which provides the highest after-tax return for Nash Corp. if it is in the 40% tax bracket?
A) Treasury bonds at 4%
B) Corporate bonds at 7.5%
C) Municipal bonds at 7.25%
D) Preferred stock at 7.5%

Question

Quizplus · Accepted Answer

Municipal bonds provide tax-exempt income, meaning the interest income is not subject to federal income tax. Therefore, the after-tax return on municipal bonds would be higher than the after-tax return on treasury or corporate bonds, even though their interest rates are lower. The after-tax return on preferred stock would depend on whether the dividends qualify for the lower tax rate on qualified dividends.