In: Finance
Personal Federal income tax rate is 30%. You are trying to decide which of the following bonds to invest in. Both are BBB rate.
1.) Kentucky Bond has a 3.2% yield.
2.) Boeing has a 4.5% yield.
Which bond would you invest in and why? Show work ... this is all the given information
tax equivalent yield = tax-free yield / (1 - tax rate)
tax equivalent yield of Kentucky Bond = 3.2% / (1 - 30%) = 4.57%
You should invest in the Kentucky Bond because it has a higher tax equivalent yield, and both bonds have equal rating.