An investor is attempting to decide between the purchase of a tax-free municipal bond or a corporate bond. She is in the 32% tax bracket (rate). A municipal bond yields 2.2% interest and a corporate bond yields 3.1% interest. Which should she purchase? Please state the reason.
An investor is attempting to decide between the purchase of a tax-free municipal bond or a corporate bond. She is in the 32% tax bracket (rate). A municipal bond yields 2.2% interest and a corporate bond yields 3.1% interest. Which should she purchase? Please state the reason.
The details given are:
Tax rate @32%
The yield of Municipal Bond: 2.2%
Corporate Bonds: 3.1%
Municipal bonds are issued by a state or central government and hence it is tax-free.
So the after-tax return from municipal bonds is 2.2% itself.
Calculation of After-Tax Return from Corporate Bonds:
The formula to calculate is,
Whereas,
After-tax return or yield is represented by R
Taxable yield is represented by y
The tax rate is represented by t
Therefore,
After-tax return or yield from corporate bonds is 2.108%.
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