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An investor in the 32% tax bracket is considering two investment options of equal risk: a corporate bond that yields 8.25% and a municipal (muni) bond that yields 4.75%. Assuming the investor will select the bond with the highest yield, which bond should this investor choose

Respuesta :

Answer: Corporate bond

Explanation:

It should be noted that the municipal bond aren't taxable. Therefore, its yield will be 4.75%.

On the other hand, the After Tax Cost of the yield of the corporate bond will be:

= Yield × (1-Tax Rate)

= 8.25% × (1-35%)

= 8.25% × 65%

= 5.36%

Therefore, the Corporate Bond should be chosen since it has a higher yield.

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