Question

which one of the following two bonds would you purchase if your marginal tax rate is 28%

1. corporate bond which yields 11% rate of return, or

2. The municipal bond which yields 6.9% rate of return

Answer 1

Answer:-

Corporate Bond are bond issued by corporate. The interest received in corporate bond is taxable hence post tax yield on corporate bond is (11% - (11%*28%))

=11%- (3.08%)

yield post tax = 7.92

Municipal bond are bond by municipal authority to build the park, road and hospital. The interest received from municipal bond are tax free.

hence Yield is 6.9%

So considering yield good investment is Corporate bond however corporate bond is more risky than municipal bond.