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You can invest in taxable bonds that are paying a yield of 8.9 percent or a municipal bond paying a yield of 7.15 percent. Assume your marginal tax rate is 21 percent. Which security should you buy

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thaovtp1407

Answer:

We should invest in municipal bond to have profit.

Explanation:

  • taxable bonds: 8.9 percent
  • municipal bond:  7.15 percent
  • marginal tax rate: 21 percent.

So we need to identify the after-tax or equivalent tax exempt yield on the taxable bond:

8.9% ( 1 - 21%)

= 0.089*0.79

= 0.0703 = 7.03%  

and it is smaller than the  yield of municipal bond (7.15%)  so we should invest in municipal bond to have profit.

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