If a taxpayer in the 28% tax bracket has the opportunity to invest in a taxablec

Question

If a taxpayer in the 28% tax bracket has the opportunity to invest in a taxablecorporate bond that pays 6% interest or to invest in a tax-exempt municipal bond that pays 3.5% interest (assuming that all other elements of the two bonds, e.g., risk, are equal and that taxable interest would not put the taxpayer in a higher tax bracket), which investment (without considering any effect of state and local taxes) would generate the greater after-tax yield?

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Explanation / Answer

Answer: Taxable corporate Bond will generate the greater after tax yield because after tax paid yield rate is greater than municial yield rate.

Yield rate=6%(1-0.28)

=4.32%

Municipal bond=3.5%

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