Suppose your tax bracket is 33%. Would you prefer to earn a 6% taxable return of...

Suppose your tax bracket is 33%. Would you prefer to earn a 6% taxable return of a 4% tax-free yield from a muni?

A. Municipal bond preferred

B. Corporate Bond (taxable) preferred

C. Because 6% and 5.97% are VERY close, the difference is small enough that the preference would hinge on other factors, while technically, you would prefer the 6% taxable return, which has a SLIGHTLY higher 4.02% after-tax return.

Solutions

Expert Solution

Equivalent taxable yield=municipal bond yield/(1-tax rate)

=4/(1-0.33)

=5.97%(Approx)

Hence Corporate Bond should be preferred having higher return comparatively

Hence the correct option is:

B. Corporate Bond (taxable) preferred

jeff jeffy answered 2 years ago

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